Connecticut Property Taxes Explained


If you live in Connecticut, any property you own when you die will be assessed to determine whether your estate owes the IRS or Connecticut – or both – or neither. Your estate includes your house, car, furniture, bank account, brokerage account, IRA, 401 (k), business interests, and whatever you call it yourself. But the assets transferred to a spouse are not counted in your taxable patrimony.

Last week, we discussed federal property taxes and how they are affected by the U.S. taxpayer relief law the President enacted on January 3. This week, let’s take a look at the Connecticut property taxes, which were last changed in 2011.


Connecticut

Connecticut estates over $ 2 million are taxed at different rates. The rates vary from 7.2 percent for estates over $ 2 million to a maximum of 12 percent for estates over $ 10.1 million. The first $ 2 million is not taxable.

For example, the Connecticut estate tax for a $ 2 million estate is zero. A $ 3 million estate is taxed $ 72,000 (7.2 percent of $ 1 million). A $ 5 million estate would pay Connecticut estate tax of $ 252,000 (8.4% of $ 3 million). A $ 10 million estate would pay $ 912,000 (11.4% of $ 8 million). Connecticut tax is due six months after death.

You may recall that before 2010 we had a “cliff top” tax structure. A $ 2 million estate paid no Connecticut estate tax. But an estate of $ 2,000,001 – just a dollar more – paid Connecticut $ 101,700.

A Connecticut law passed in 2011 removed the cliff. Now, an estate of $ 2,000,001 would only be taxed for a few cents. Again, there is no Connecticut estate tax on estates under $ 2 million.

Federal taxes

Until a few weeks ago, it was not clear whether a $ 1 million estate would be subject to federal inheritance tax. Now it is resolved. Only estates over $ 5 million (adjusted for inflation estimated at $ 5.25 million for deaths in 2013) are subject to federal inheritance tax, thanks to American Taxpayer Relief Act promulgated on January 3. This means that estates of people who died in 2013 are non-taxable at the federal level if they are valued at $ 5.25 million or less.

Because of “portability”, spouses can pass $ 10.5 million to their heirs without federal inheritance tax. Portability preserves the $ 5.25 million exemption federally, but not in Connecticut for the first spouse to die.

Connecticut and Federal

To see the effect of the two tax regimes, we need to consider the size of the estate,

Individuals with estates of less than $ 2 million will pay nothing to Connecticut or the IRS.

Individuals with estates over $ 5.25 million will pay taxes to both the IRS and Connecticut.

For example, a $ 6 million estate will be taxed $ 360,000 in Connecticut (9 percent of $ 4 million, with the first $ 2 million tax-free).

Since Connecticut tax can be deducted from the federal tax return, the $ 360,000 paid to Connecticut reduces the federally taxable estate by $ 6 million to $ 5.64 million, according to Robert F. Cohn, author of the Connecticut Estate Planning Wills and Trusts Library, published by Data Trace Publishing Co. Cohn is with the New Haven law firm of Zangari Cohn Cuthbertson PC

Federal inheritance tax is $ 156,000, calculated as follows: $ 5.64 million minus $ 5.25 million or $ 390,000; 40% of $ 390,000 is equal to $ 156,000.

A $ 6 million estate would pay a total of $ 516,000, including both Connecticut and federal property taxes.

$ 2M to $ 5.25M

Estates valued between $ 2 million and $ 5.25 million will owe Connecticut taxes, but no federal estate tax.

Since the Connecticut tax rate for estates between $ 2 million and $ 5.25 million ranges from 7.2% to 8.4%, every $ 100,000 of assets over $ 2 million dollars will cost between $ 7,200 and $ 8,400 in Connecticut taxes.

This amount can potentially be saved through planning – or avoided altogether by moving to a tax-free state, like Florida.

With proper planning, a married couple can spend $ 4 million without federal and Connecticut estate taxes, Cohn explained.

The usual method is a bypass trust or credit shelter trust that transfers the exemption amount from the first spouse to a survivor trust. Unlike federal law, Connecticut does not have “portability” where unused first-to-die exemptions automatically pass to the surviving spouse.

Remember, Cohn said: In Connecticut, the rule is “Use it or lose it.” Couples must plan to protect Connecticut’s $ 2 million per person exemption, or it is lost when the first spouse dies.

Here’s an example based on a question from a reader: A married couple with $ 8 million has all of their assets in the common name with rights of survivorship. There will be no federal or Connecticut estate tax when the first spouse dies and no federal tax when the second spouse dies due to portability. In Connecticut, the $ 8 million will be reduced by $ 2 million (not $ 4 million), when it comes to paying Connecticut taxes.

Planning before the first death can save an additional $ 2 million. As always, be sure to consult your tax advisor before taking any action.

Next week we will discuss the freebies.

Julie Jason, JD, LLM, award-winning author of “The AARP Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad” and “Managing Retirement Wealth: An Expert Guide to Personal Portfolio Management in Good Times and Bad”, is Jackson Director, Grant Investment Advisers, Inc. of Stamford Please email him with questions at [email protected] or write to him c / o The Advocate, 9A Riverbend Drive South, Box 4910, Stamford, CT 06907. Copyright 2013 Julie Jason.


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