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Connecticut · what’s new
What’s new in Connecticut for 2026: the IRA subtraction reaches 100%, and a federal law that never arrives
What changed on Form CT-1040 between the 2025 and 2026 tax years, and what did not. The last step of the IRA phase-in; why the federal deductions for tips, overtime, seniors and car-loan interest have no effect on a Connecticut return; the handful of new subtractions and credits from the 2025 and 2026 sessions; the bills that died; the $15 million estate and gift line; and an election with no tax question on the ballot. For anyone who files here.
By Charles Trautman, EA, editor
Need to Know Tax · written from Connecticut Department of Revenue Services (DRS) sources, November 3, 2026; updated November 12, 2026 after the election · not yet reviewed by a Connecticut practitioner
The bottom line
- Rates and brackets are unchanged for 2026, 2% to 6.99%.
- None of the federal deductions for tips, overtime, seniors or car-loan interest reaches Form CT-1040, which starts from federal adjusted gross income.
- The last step of the IRA subtraction phase-in applies for 2026.
- New for 2026: retirement pay of the U.S. Public Health Service Commissioned Corps is subtracted in full.
- The Connecticut earned income credit is 40% of the federal credit, plus $250 with a qualifying child.
- Mandatory withholding on lump-sum retirement distributions stays suspended.
- Form CT-1040 is due Thursday, April 15, 2027. Late payment costs a 10% penalty plus 1% a month in interest.
- No tax measure was on the November 3 ballot. National Guard active-service pay becomes exempt in 2027.
For most Connecticut households the 2026 return will look exactly like the 2025 return. The rates, the personal exemption, the phase-out, the recapture and the credits are the figures they were in 2024, because Connecticut indexes none of them and the General Assembly changed none of them. The one change that reaches a lot of people is for retirees: the subtraction for traditional IRA distributions, phased in since 2024, reaches 100% for 2026, so an IRA withdrawal is treated like a pension if federal AGI is under $75,000 single or $100,000 joint. The larger story is what the federal tax law of July 2025 did not do here. Connecticut starts from federal adjusted gross income, and the new federal deductions for tips, overtime, seniors and car-loan interest are all taken after that line. They never reach Connecticut. Tips are taxed. Overtime is taxed. The $6,000 senior deduction is invisible.
The Department of Revenue Services publishes the 2026 Form CT-1040 instructions in December. The figures below come from the Department’s 2024 and 2025 tables, the 2026 Form CT-W4, the Department’s summary of the 2025 legislation and the Office of Legislative Research’s summary of the 2026 acts. Because nothing is indexed, the December booklet should match the 2025 tables line for line.
The one change most people will feel: IRA distributions, 100%
Connecticut has exempted pension and annuity income for lower- and middle-income retirees since 2019, but traditional IRA distributions were left out until a 2023 law phased them in: 25% of the distribution could be subtracted for 2024, 75% for 2025, and 100% for 2026 and after. The 2026 return is the first full year. A retiree whose federal AGI is under $75,000 single or $100,000 joint now subtracts every dollar of taxable traditional, SEP and SIMPLE IRA distributions on Schedule 1, the same as a 401(k) or a company pension.
Two limits still apply. The test is federal AGI, which includes the distribution itself: a $40,000 withdrawal on top of $70,000 of other income puts a joint filer at $110,000, inside the phase-down band, where only 70% is subtracted; the band runs to $100,000 single and $150,000 joint, where the subtraction is zero. And a Roth conversion is a taxable IRA distribution, eligible only if the conversion does not push federal AGI over the line. The full rules, with a retired couple worked through, are in Connecticut for retirees.
| Tax year | Share of IRA distribution eligible | Then limited by federal AGI |
|---|---|---|
| 2023 and earlier | 0% | No subtraction for IRAs |
| 2024 | 25% | Same phase-down as pensions |
| 2025 | 75% | Same phase-down as pensions |
| 2026 and after | 100% | 100% under $75,000 single / $100,000 joint; 0% at $100,000 / $150,000 |
Roth IRA distributions are not in federal AGI and need no subtraction. Inherited IRA distributions count as IRA distributions and get the same treatment.
The federal law of 2025, item by item
Connecticut follows the Internal Revenue Code for one purpose: defining federal adjusted gross income, Line 1 of Form CT-1040. There is no standard deduction on the Connecticut return, no itemized deductions, no place for a below-the-line deduction to land. When Congress wrote the 2025 deductions for tips, overtime, seniors and car-loan interest as deductions from AGI rather than exclusions from income, it settled the Connecticut question without a vote in Hartford. The income stays in AGI; Connecticut taxes it.
| Federal change | Reaches Connecticut? | What it means on Form CT-1040 |
|---|---|---|
| Deduction for tips (up to $25,000) | No, by structure | Tips are in federal AGI on Line 1 and nothing removes them. Taxed at the full graduated rates. |
| Deduction for overtime premium (up to $12,500 / $25,000) | No, by structure | Same. The overtime premium stays in Connecticut income. |
| $6,000 senior deduction, age 65 and older | No, by structure | Below the line; never reaches Connecticut AGI. Connecticut’s own senior relief is the Social Security and pension/IRA subtractions, which depend on income, not age. |
| Car-loan interest deduction | No, by structure | Below the line; no Connecticut effect. |
| Higher SALT cap ($40,400 for 2026) | Not applicable | Connecticut has no itemized deductions, so there is nothing to cap. Business owners use the elective pass-through entity tax instead; the credit is claimed on Schedule CT-PE at 87.5% of the owner’s share. |
| 100% bonus depreciation restored | Decoupled since 2017 | Above the line, so it would flow through, but Connecticut adds back 100% of federal bonus depreciation on Schedule 1 and lets it back out 25% a year over the following four years. 80% of a Section 179 deduction is added back the same way. |
| New section 168(n) expensing for production property; section 174A research expensing | Decoupled for corporations | Public Act 26-68, sections 265 and 266, decouple the corporation business tax from 168(n) and delay 174A conformity for years after 2025. The Office of Legislative Research files both under the corporation tax; whether a Schedule 1 add-back reaches sole proprietors and pass-through owners is to come (verify). |
| Above-the-line items: IRA, HSA, student loan interest, educator expenses, self-employed health insurance | Yes, automatically | Anything that reduces federal AGI reduces Connecticut AGI dollar for dollar. |
The rule of thumb: if a federal change moves Line 11 of Form 1040, it moves Form CT-1040. If it moves only Line 12 onward, Connecticut never sees it.
Worked example: what the federal tips deduction did to a Connecticut server’s return
A restaurant server, single, under 65, with $34,000 of wages and $12,000 of reported tips in 2026. Federally, the tips deduction takes the $12,000 out of taxable income. In Connecticut, the tips are in federal AGI, and because Connecticut AGI is also what shrinks the personal exemption, the tips cost more than their own tax.
| Wages only, $34,000 | Wages plus tips, $46,000 | |
|---|---|---|
| Federal AGI (CT-1040 Line 1) = Connecticut AGI | $34,000 | $46,000 |
| Personal exemption: $15,000 less $1,000 per $1,000 of CT AGI over $30,000 | −$11,000 | $0 (gone at $44,000) |
| Connecticut taxable income | $23,000 | $46,000 |
| Tax: 2% of first $10,000, then 4.5% | $785 | $1,820 |
| Personal tax credit, Table E: 10% at this income | −$79 | −$182 |
| Connecticut tax | $706 | $1,638 |
| Connecticut tax on the $12,000 of tips | $932, about 7.8% | |
| Federal tax on the $12,000 of tips | $0 |
The $932 is more than 4.5% of $12,000 because the tips also erased $11,000 of exemption. Had HB 5010 passed, the tips would come off on Schedule 1 and the exemption would come back. It did not pass.
The Connecticut changes, 2025 and 2026 sessions
EITC bonus of $250 for parents, year two. Public Act 25-168, section 371, added $250 to the Connecticut earned income tax credit for any eligible filer with at least one federal qualifying child, starting with tax year 2025, and the act has no sunset. The Connecticut EITC itself stays at 40% of the federal credit, refundable, for full-year residents with valid Social Security numbers. The Department’s 2025 maximums were $3,218 with three or more children, $2,861 with two, $1,731 with one and $260 with none, before the $250; the 2026 maximums follow the 2026 federal figures and are to come. Whether the 2026 Schedule CT-EITC carries the bonus as a separate line is to come (verify). See Credits and breaks for Connecticut families.
Family child care home owner credit, new for 2026. Public Act 25-168, section 372: a $500 refundable credit for the owner of a family child care home licensed by the state, first available on the 2026 return. The same act created a 20% farm investment credit, also refundable, also beginning 2026, for eligible farmers.
U.S. Public Health Service Commissioned Corps retirement pay, new subtraction for 2026. Public Act 26-68, section 277, adds retirement pay of the Commissioned Corps to the Schedule 1 subtractions for tax years beginning on or after January 1, 2026. Military retirement pay is already 100% subtracted at any income; this closes the gap for the uniformed service that was left out.
Honor guard pay, new subtraction for 2026. Public Act 26-35, section 18, exempts pay for honor guard details at veterans’ funerals, tax years beginning on or after January 1, 2026. Section 19 of the same act exempts National Guard active-service pay, but not until tax year 2027.
Family caregiver credit, enacted for 2027, not 2026. Public Act 26-68, section 271: a nonrefundable credit of 50% of eligible caregiving expenses, up to $2,000, for filers with federal AGI under $50,000 single, head of household or married filing separately, or $100,000 joint. It takes effect for tax years beginning January 1, 2027, so it is not on the 2026 return. Save the receipts starting in January.
Lump-sum pension and IRA withholding stays voluntary. Mandatory Connecticut withholding on lump-sum distributions (more than $5,000, or more than half the account) was suspended in July 2025 and Public Act 26-130, section 18, extends the suspension through December 31, 2027. A payer withholds Connecticut tax from a lump sum only if the payee asks on Form CT-W4P. Anyone taking a large distribution in 2026 who did not ask has no Connecticut withholding and should look at an estimated payment.
Estate and gift tax: $15 million. The Connecticut estate and gift tax exemption tracks the federal basic exclusion amount, which the 2025 federal law set at $15,000,000 for 2026. The Department’s estate and gift tax page, updated June 30, 2026, confirms the figure: the tax is 12% of the Connecticut taxable estate, or of cumulative lifetime Connecticut taxable gifts since 2005, above $15 million, and total estate and gift tax is capped at $15 million. The 2027 figure follows the federal amount, which is indexed after 2026, and is to come. Connecticut remains the only state with a gift tax; a 2026 gift over the federal annual exclusion goes on Form CT-706/709, due April 15, 2027.
Convenience-rule refund credit. Public Act 25-172 gives a Connecticut resident who wins a refund of another state’s convenience-of-the-employer tax a credit of 60% of the extra Connecticut tax that results when the Schedule 2 credit is readjusted, with penalties and interest waived. Which line of the 2026 return carries it is to come (verify). See Moving to Connecticut.
Property tax, at town hall rather than on the return. Public Act 26-68, sections 224 and 225, let a town adopt a $50,000 exemption from the assessed value of an owner-occupied primary residence, beginning with the grand list of October 1, 2027, with an annual form to the assessor by November 1. It is optional for the town and does nothing for the 2026 income tax return. Public Act 26-114 sends Circuit Breaker extension requests to the assessor instead of the Office of Policy and Management, and makes a town filing due on a weekend or holiday timely on the next business day.
What was filed and did not move
Tips and overtime. House Bill 5010 (2026), “An Act Exempting Tips or Gratuities and Overtime Pay from the Personal Income Tax,” introduced by the House Republican leadership, was referred to the Finance, Revenue and Bonding Committee on February 4, 2026 and given a public hearing on February 27. The bill status shows nothing after that. It was not enacted. Tips and overtime remain fully taxable, and because the federal deductions are below the line, no add-back is needed on the Connecticut return; the income simply never left.
The child tax credit. Connecticut has no child tax credit and no dependent exemption. A permanent credit of $600 per child, capped at $1,800, was proposed in 2025 and again in 2026 and failed both times. The $250 EITC bonus is what passed in its place, and it reaches only families who qualify for the EITC.
The property tax credit. The Governor’s February 2025 proposal to raise it from $300 to $350 and widen the income limits to $70,000 single and $100,000 joint was not enacted. The credit stays at $300, full to Connecticut AGI of $49,500 single and $70,500 joint.
Rates and brackets. No bill to change them advanced. The 2026 Form CT-W4 (Rev. 12/25, effective January 1, 2026) carries the same $12,000, $15,000, $19,000 and $24,000 filing-threshold figures and the same 6.99% top rate as before.
The ballot
There was no statewide tax question on the November 3, 2026 ballot. Connecticut has no citizen initiative or referendum, and the General Assembly referred no constitutional amendment. Voters elected the Governor, the other constitutional officers and the General Assembly. What the 2027 session does about the child tax credit, the tips and overtime exemption and the property tax credit is open; none of it can touch the 2026 return.
Behind the scenes: why Connecticut never had to vote on the federal law
Connecticut adopted its income tax in 1991 and built it on federal AGI with a flat rate and a personal exemption. The exemption phase-out, the phase-out of the lowest bracket and the recapture were added later as the rate became graduated, each one a way to raise money from higher earners without raising the printed rates. None of them were indexed, which is why the tables have not moved since 2024 and why a 3% raise walks a household into a smaller exemption every year.
Starting from AGI has a second effect. Whenever Congress adds a deduction below the line, Connecticut keeps the revenue the federal government gave up, automatically, with no vote and no notice from the Department, because no rule changed. That is what happened in 2025. Where the state did act, in bonus depreciation and Section 179, it acted the other way: to decouple from a federal deduction that would have reached Connecticut through AGI.
What to bring
- Last year’s Form CT-1040, so the 2026 figures can be compared line by line; nothing on the form should have changed except the IRA percentage
- Every 1099-R, marked pension, 401(k), traditional IRA, Roth IRA or inherited IRA, so the right subtraction percentage is applied
- Form SSA-1099, and a total of all other income, since the $75,000 / $100,000 lines are tested on federal AGI
- For a Public Health Service Commissioned Corps retiree, or a veteran paid for honor guard duty: the 1099-R or W-2 that shows it
- For a business, farm or rental: the federal Form 4562, so the Connecticut bonus depreciation and Section 179 add-backs can be figured
- Any large pension or IRA distribution taken in 2026, with whatever Connecticut withholding (if any) the payer took
- Gifts over the federal annual exclusion made in 2026, for Form CT-706/709
Questions people ask
I don’t owe federal tax on my tips anymore. Why do I owe Connecticut?
Because the federal tips deduction is taken after adjusted gross income, and Form CT-1040 starts from adjusted gross income. The tips are on Line 1 and nothing takes them back out. The same is true of the overtime deduction and the $6,000 senior deduction. HB 5010, which would have exempted tips and overtime at the state level, died in committee in 2026.
Did the Connecticut rates or brackets change for 2026?
No. The seven brackets, 2% to 6.99%, are the same as 2024 and 2025. Connecticut does not index its brackets, exemption or credit tables, and the 2026 legislature did not change them. The 2026 Form CT-W4 and withholding tables carry the same figures.
Is my IRA withdrawal tax-free in Connecticut now?
If your federal AGI, including the withdrawal, is under $75,000 single or $100,000 joint, yes: 100% of the taxable traditional IRA distribution comes off on Schedule 1 for 2026. Between those lines and $100,000 / $150,000 a declining share comes off; above that, none. Roth distributions are not taxed federally or by Connecticut in the first place.
Does the $6,000 federal senior deduction cut my Connecticut tax?
No. It is below the AGI line. Connecticut’s senior relief is the Social Security subtraction and the pension and IRA subtraction, and both are tested on federal AGI, not age.
Did Connecticut pass a child tax credit?
No. The proposals failed in 2025 and 2026. What passed is a $250 addition to the Connecticut EITC for filers with a qualifying child, which began with the 2025 return and continues for 2026.
Is the family caregiver credit on my 2026 return?
No. Public Act 26-68 makes it effective for tax years beginning January 1, 2027. The first return that can claim it is the 2027 return, filed in 2028. Keep receipts for 2027 expenses.
One change for retirees, none for anyone else, and a federal law that stops at Line 1
Take the full IRA subtraction if your income is under the line, expect tips and overtime to be taxed as before, and check the Department’s December instructions against last year’s tables; they should match.
Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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Forms and official pages named in this article
- DRS individual income tax forms: 2025 Form CT-1040, Schedule CT-EITC, Schedule CT-PE and instructions (the 2026 forms are to come)
- 2024 Form CT-1040, Connecticut Resident Income Tax Return, with Schedules 1 through 5
- 2026 Form CT-W4, Employee’s Withholding Certificate (Rev. 12/25, effective January 1, 2026)
- DRS: Estate and Gift Tax Information (Form CT-706/709; 2026 exemption and rate)
Sources and where to check
- DRS: 2025 Legislative Overview, Income Tax (EITC $250, family child care home credit, farm investment credit, lump-sum withholding, convenience-rule credit)
- Office of Legislative Research: 2026 Acts Affecting Taxes (PA 26-35, 26-68, 26-114, 26-130)
- Shipman & Goodwin: 2026 Connecticut Tax Developments (section references and effective dates)
- Office of Legislative Research Report 2025-R-0152: Connecticut Income Tax Treatment of Retirement Income (pension and IRA phase-down table, IRA phase-in by year)
- Office of Legislative Research Report 2026-R-0106: State Taxation of Social Security Benefits (July 30, 2026)
- DRS: Connecticut Earned Income Tax Credit (40%, $250 bonus, 2025 maximums)
- Office of the Governor, February 2025: proposal to raise the property tax credit to $350 (not enacted; current $300 rules)
- Connecticut General Assembly: HB 5010 (2026) bill status, tips and overtime exemption
- DRS TPG-211: Withholding Calculation Rules effective January 1, 2024 (Tables A through E)
- Ballotpedia: Connecticut elections, 2026 (no statewide ballot measures)