Looking for ways to lower your overall tax bill in retirement? Here’s how to pay taxes in a different state than Connecticut.
The rise of remote work during the Covid-19 pandemic has given many professionals the flexibility to live where they want, regardless of where their employer is located. Since March 2020, many people have departed densely populated coastal cities for roomier, less expensive homes in the suburbs and other states.
However, the pandemic is only one factor contributing to the mass exodus from certain U.S. states. For example, many people cited retirement as their primary reason for relocating in 2020. Indeed, many retirees left high-tax states like New Jersey, New York, Illinois, California, and of course, Connecticut, for more tax-friendly states.
Of course, not everyone wants to relocate full-time. After all, family, friends, and lifestyle preferences may outweigh the financial burden of living in high-tax states like Connecticut. In this article, we’re sharing how to pay taxes in a different state than Connecticut while still calling Connecticut home.
What Is Connecticut’s State Income Tax?
It may not surprise you that Connecticut is among the top states seeing resident departures of late. In fact, Connecticut ranked 4th in terms of outbound residents during 2021, according to U.S. News & World Report.
Indeed, Connecticut has one of the highest tax burdens in the country. A recent WalletHub report ranked Connecticut seventh in the nation when it comes to individual income, property, sales and excise taxes as a share of total personal income.
Those of us who call Connecticut home understand the tax burden that comes with living here. To be sure, the highest earners pay 6.99% of their income to the state each year. Connecticut also has a 7.5% corporate income tax rate.
In comparison, states like Florida, Nevada, and Texas don’t tax residents’ personal income. Neither does nearby New Hampshire, although the state does tax interest and dividends. These states naturally attract retirees looking to preserve more of their wealth long-term.
What Determines Connecticut Residency?
It’s no secret that other states provide more attractive conditions for retirees than Connecticut. This is true at least in terms of cost of living. But what if you don’t want to live in another state year-round?
Fortunately, you can claim residence in another state while maintaining your home in Connecticut. However, certain conditions must be met to avoid paying Connecticut state income tax.
According to the state of Connecticut, a resident is an individual domiciled in Connecticut for the entire tax year. The state also considers you a resident if you maintained a permanent place of residence in Connecticut and spent more than 183 days there. And if certain other conditions are met, residents of Connecticut must file a state income tax return.
Who Files a Connecticut Tax Return?
You must file a Connecticut income tax return if you’re a resident and any of the following conditions are true in a given tax year:
- Your employer withheld Connecticut income tax from your wages;
- You made estimated tax payments to Connecticut or a payment with Form CT-1040 EXT;
- You had a Pass-Through Entity Tax Credit;
- You meet the Gross Income Test;
- You had a federal alternative minimum tax liability;
- You’re claiming the Connecticut earned income tax credit (CT EITC).
Generally speaking, if you’re a resident and your gross income exceeds $15,000 as a single filer ($24,000 if you’re married filing jointly), you must file a Connecticut income tax return. If none of the above conditions applies, you do not need to file a state tax return in Connecticut.
How to Claim Residence and Pay Taxes in Another State If You’re Still Working
To successfully claim residence and file taxes in a different state than Connecticut, certain conditions apply. First, you must spend no more than 182 days in Connecticut.
In addition, since Connecticut imposes the “convenience rule,” Connecticut employers can withhold income tax even if workers don’t live there—meaning, you could potentially pay taxes in two states on the same income. However, this rule only applies in Connecticut if you move to another “convenience” state. These states include Delaware, Massachusetts, Nebraska, New York, and Pennsylvania.
The convenience rule is complex and ultimately may not impact your ability to claim permanent residence elsewhere. Suffice it to say that splitting time between Connecticut and a more tax-friendly state is easier when you’re no longer employed by a Connecticut-based organization.
How to Claim Residence and Pay Taxes in Another State If You’re Retired
“Snowbirds” can also potentially raise red flags with state tax collectors. Snowbirds are people—typically retirees—who leave chillier states like Connecticut to enjoy warmer weather and possibly lower tax rates in states like Florida.
To avoid paying taxes in Connecticut, you must establish a domicile in your state of choice. For example, suppose your second residence is in Florida. Good first steps are to register to vote there, get a Florida driver’s license, and register your car in-state. To err on the side of caution, you may also want to make sure that your Florida residence is comparable in size to your Connecticut residence.
Lastly, be sure to keep receipts and other documentation that can prove you were in Florida (or whatever state you claim as your permanent residence) for at least 183 days of the year. This way you’re ready in the event of an audit.
Consult a Tax Expert Before Filing State Taxes
As a remote worker or retiree, you have a great deal of flexibility when it comes to where you spend your time. And since minimizing your taxes in retirement can preserve your nest egg longer term, claiming residence in a more tax-friendly state can be an attractive proposition.
Nevertheless, be sure to consult a tax expert to ensure you’re meeting the requirements to claim residence and pay taxes in a different state. In addition, a financial planner can help you make the right decision within the context of your financial plan so that the benefits of paying taxes in a new state outweigh the potential costs.
Milestone Asset Management Group has both financial planners and tax professionals in house to help our clients make smart decisions for retirement and beyond. If you’d like to consult an expert about your retirement plan and potentially splitting time between Connecticut and another state, please schedule a call to get started. We look forward to hearing from you!