CPAs need to be aware of current tax developments in key states to properly advise clients that are doing business in multiple jurisdictions. Below is an overview of some key developments in Connecticut and New Jersey.
Two recently enacted tax initiatives, the Connecticut Fresh Start Program and the new withholding requirements on pension distributions, may have a broad impact on many businesses operating in the state.
Fresh Start Program.
This is a voluntary tax compliance initiative available to both businesses and individuals wishing to report their outstanding, unreported tax liabilities. This program applies to tax returns due before December 31, 2016; in exchange for filing outstanding returns and remitting tax liabilities, the Connecticut Department of Revenue Services (DRS) will waive penalties and half of the interest due. For certain taxpayers who failed to file a tax return, the DRS may limit the scope of its review of prior year returns.
Taxpayers are ineligible for the program if they—
- have received a Connecticut tax bill in connection with the unreported liability,
- are under audit,
- are party to a closing agreement with the DRS,
- have made an offer of compromise that has been accepted by the DRS,
- have protested a determination of an examination, or
- are a party to litigation against the commissioner.
Qualified taxes (other than motor carrier road taxes) include personal income, corporate, business entity, sales/use, withholding, and gift taxes. Applications must be completed online at the DRS’s website or at http://www.makeafreshstartct.com and will be accepted through November 30, 2018.
CPAs with affected clients should consider this initiative to mitigate unreported tax exposures within Connecticut.
Withholding requirements for pension or annuity distributions.
Beginning January 1, 2018, payers of pension or annuity distributions that maintain an office or transact business in Connecticut must withhold income tax from periodic payments to Connecticut residents. Prior to January 1, 2018, payers were required to deduct and withhold income tax only when the payee requested that they do so. The withholding requirements apply to pension or annuity distributions from employer pensions, annuities, profit-sharing plans, stock bonus plans, deferred compensation plans, individual retirement accounts (IRA), endowments, and life insurance contracts.
The new withholding requirement for pension distributions received little fanfare, but affects many businesses. Since the requirement is new and the state has a broad definition of the types of income subject to withholding, this provision may surprise some Connecticut businesses and individual taxpayers.
The 2018 Form CT-W4P requires payees to choose a withholding code based on the payee’s 2018 anticipated filing status and estimated annual gross income. Payers must calculate the amount of withholding on periodic payments in the same method used by employers for determining the amount to withhold from an employee’s wages. If a payee does not provide a completed CT-W4P, the payer must deduct and withhold 6.99% from the taxable portion of any distribution. Lump-sum distributions of a resident’s entire account balance, excluding any other tax withholding and administrative charges and fees, are taxable at the highest marginal personal income tax rate unless a portion of the lump-sum distribution was previously taxed or the lump-sum distribution is a rollover through a direct trustee-to-trustee transfer.
The New Jersey Division of Taxation (DOT) recently provided a summary of several tax law changes, which took effect on January 1, 2018, that CPAs need to be aware of to properly advise their clients accordingly. The changes include two new tax credits, the revision of the Angel Investor Tax Credit, a gradual increase in the retirement exclusion, an exemption for veterans who are honorably discharged or released from active duty from the U.S. Armed Forces, the phasing out of the New Jersey estate tax, and a reduction in the sales and use tax rate for 2017 and 2018.
The DOT has added two new credits to the corporate business tax return:
- Business Employment Incentive Program Credit (Form 324)
- Public Infrastructure Credit (Form 325).
Businesses that qualify for these credits must attach the respective forms to their corporation business tax returns. In addition, the Angel Investor Tax Credit has been revised to allow a credit for a qualified investment in a New Jersey emerging technology business holding company if 100% of the investment is transferred from the holding company to the New Jersey emerging technology company. This credit will be applied retroactively to qualified investments made for tax years beginning on or after January 1, 2012.
Gross income tax.
The retirement income exclusion is available to taxpayers with $100,000 or less in gross income for the entire year and who are 62 or older, blind, or disabled. The exclusion increases each year until tax year 2020 as follows:
- For 2017: $30,000 for single taxpayers, $40,000 for married taxpayers filing jointly, and $20,000 for married taxpayers filing separately
- For 2018: $45,000 for single taxpayers, $60,000 for married taxpayers filing jointly, and $30,000 for married taxpayers filing separately
- For 2019: $60,000 for single taxpayers, $80,000 for married taxpayers filing jointly, and $40,000 for married taxpayers filing separately
- For 2020: $75,000 for single taxpayers, $100,000 for married taxpayers filing jointly, and $50,000 for married taxpayers filing separately.
An exemption of $3,000 is now provided to veterans who are honorably discharged or released from active duty in the U.S. Armed Forces.
Sales and use tax.
The New Jersey sales and use tax rate was reduced from 7% to 6.875% for taxable sales occurring on or after January 1, 2017. Additionally, the sales and use tax rate will decrease to 6.625% for taxable sales occurring on or after January 1, 2018.
As of January 1, 2018, the New Jersey estate tax has been phased out. Individuals passing away on or after January 1, 2018, can leave their entire estate to their heirs without being subject to any New Jersey estate tax. For more on this topic, see “New Jersey Estate Tax Repeal,” by Martin M. Shenkman, The CPA Journal, January 2017 (https://www.cpajournal.com/2017/01/22/erp-n-j-estate-tax-repeal/).