CPAs need to be aware of recent legislative developments at the state level in order to properly advise taxpayers doing business in multiple jurisdictions. After a three-month political stalemate, the Connecticut General Assembly recently approved a two-year, $41.3 billion budget. Governor Malloy signed the original bill on October 31, 2017; technical corrections were made and approved by the governor on November 21, 2017. The budget raises taxes, eliminates or lowers tax credits, cuts town aid and funding for the University of Connecticut, modifies the statutory spending cap, raids the energy conservation funds, and provides aid to the City of Hartford to help stabilize its financial situation. This article will provide CPAs with a summary of Connecticut’s recent changes.
“Fresh Start” Voluntary Disclosure Program
The budget authorized the Department of Revenue Services (DRS) commissioner to establish a CT Fresh Start program, allowing the DRS to enter agreements with qualified taxpayers who have outstanding tax liabilities. In exchange for filing outstanding returns and paying tax liabilities, the DRS will waive penalties and half of the interest due on delinquent state taxes (other than motor carrier road taxes). For taxpayers who failed to file a tax return, the DRS will allow a limited look-back period (i.e., limit the scope of its review of prior year returns). The program runs from the date of the bill’s passage to November 30, 2018, and covers tax returns due on or before December 31, 2016.
Corporation Business Tax
Current Connecticut law allows certain publicly traded companies to claim a deduction over a seven-year period if the Connecticut combined corporate business tax reporting results in an acceleration of income tax (increase in net deferred tax liabilities or decrease in net deferred tax assets). This deduction is referred to as a FAS 109 deduction. The period for claiming a FAS 109 deduction was extended from 7 years to 30 for publicly traded companies filing on a combined basis. The technical correction package delayed the start date for this provision (initially 2018) to income years beginning in 2021.
Personal Income Tax
The income threshold for the 100% exemption for Social Security benefits was increased—
- for single filers and married filing separately, federal adjusted gross income (AGI) of less than $75,000 (previously $50,000); and
- for joint filers and heads of household, federal AGI of less than $100,000 (previously $60,000).
The 75% exemption for Social Security benefits over these thresholds remains unchanged. This change, originally effective January 1, 2018, was delayed by the technical corrections package to January 1, 2019.
In addition, the property tax credit was limited, for the 2017 and 2018 tax years, to senior citizens (age 65 or older) and those taxpayers with dependents.
Beginning in 2017, the earned income tax credit was reduced from 30% to 23%.
Beginning in 2019, a new refundable personal income tax credit was established for college graduates in science, technology, engineering, or math-related fields who live and work in Connecticut. The credit ($500) may be claimed for each of the five successive taxable years after graduation; however, the graduate must live in or move to Connecticut within two years of graduation.
The income tax on pension and annuity income will be phased out, from 2019 through 2025—
- for single filers, married people filing separately, and heads of households, with AGI less than $75,000; and
- for married people filing jointly with AGI less than $100,000.
A similar threshold change to the existing income tax exemption for pensions and annuities paid by the Teachers’ Retirement System (TRS) was also enacted. Moreover, the budget delays by two years the existing increases in the TRS income tax exemptions.
Starting July 1, 2019, there will be an expanded exemption (i.e., the ownership threshold will be lowered from 100% to 80%) for sales of services between affiliated media businesses principally located in Connecticut.
Estate and Gift Tax
Beginning in 2018, the estate and gift tax threshold will be increased over a three-year period from $2 million to the federal estate tax threshold ($5.49 million for 2017). Beginning in 2019, the cap on the maximum estate and gift tax is lowered from $20 million to $15 million.
Business Tax Credits
The Neighborhood Assistance Act Tax Credit Program’s annual aggregate cap was lowered from $10 million to $5 million. The Green Building Tax Credit was eliminated for income years beginning on or after December 1, 2017. The moratorium on film and digital media production tax credits for certain motion pictures has been made permanent. Effective January 1, 2018, the applicability of these credits will be expanded to include the gross receipts tax on certain cable, satellite, and competitive video services.
Effective July 1, 2017, the hospital provider tax was increased from the current rate of 6% to a rate calculated by a formula based on the amount of revenue from hospital services for each fiscal year. The governor initially vetoed this provision, but it became part of the final budget through the technical corrections legislation.
The tax on cigarettes was raised to $4.35 per pack, and the tax on smokeless tobacco was raised to $3 per ounce, effective December 1, 2017.
The motor vehicle mill rate cap was increased from 32 to 39 mills for 2016, and to 45 mills for the 2017 assessment years.
Effective January 1, 2018, a new 25-cent fee will be imposed on transportation network companies (i.e., Uber and Lyft) for rides originating in Connecticut.
The 3% car and truck rental surcharge has been eliminated; instead, authorized rental companies can charge lessees individually itemized charges or fees as part of a rental agreement, effective January 1, 2018.
Effective in 2018, the insurance premium tax will be reduced from 1.75% to 1.5%.
A new 10.5% gross receipts tax will be imposed on fantasy sports contests effective July 1, 2019.
While the current biennial budget is balanced, the next biennial budget (for the 2020 and 2021 fiscal years) is projected to have a $4.6 billion deficit. It remains to be seen if further changes to the tax law will be necessary to balance the next budget bill.