2017 Survey of Connecticut Tax Law Developments, 061821 CTBJ, 92 CBJ 3

PositionClaim 92 CBJ 3


Claim No. 92 CBJ 3

Connecticut Bar Journal

June 18, 2021

By Alan E. Lieberman and Louis B. Schatz [*]

There were numerous significant Connecticut tax law developments in 2017. In the case of the Connecticut personal income tax, the angel investor tax credit was made available for investments in companies in all industries, the exemption for Social Security benefits was expanded, the property tax credit was further limited, and pension and annuity payments were made the subject of both a new limited exemption and a tax withholding requirement. The due date for the corporation business tax return was pushed back, the scheduled FAS 109 deduction arising out of the implementation of combined unitary reporting was both delayed until 2021 and extended from seven to 30 years, and two new programs for the use of stranded state research and development tax credits were created. The effective period of sales tax permits was reduced from five to two years, and new enforcement mechanisms were developed for delinquent taxpayers. In addition, there were increases in fees and miscellaneous taxes, such as the cigarette and tobacco products taxes, a lowering of the insurance premium tax and the creation of a new brownfields revitalization tax benefit program. Finally, the Connecticut Department of Revenue Services ("DRS") was authorized to create a "Fresh Start" Program whereby certain delinquent taxpayers could apply for relief from penalties and one-half of the interest that otherwise would be due on state taxes that have not been reported or were underreported.

This Survey summarizes Connecticut tax legislation enacted, court decisions rendered and administrative guidance published by the DRS during 2017.

I. Personal Income Tax

A. Legislation

1. Angel Investor Tax Credit

The statute governing the angel investor tax credit program has been amended. In general, the program allows qualifying accredited investors who invest at least $25,000 in a business certified by Connecticut Innovations, Inc. ("CI") to be eligible for a personal income tax credit equal to 25% of their investment (provided that the total tax credits allowed to any investor cannot exceed $250,000). Effective July 1, 2017, the statute now: (i) permits all businesses with a principal place of business in Connecticut to seek to be certified by CI (under former law, only businesses in certain emerging technologies could be certified); and (ii) generally prohibits CI from reserving more than 75% of the angel tax credits available during a fiscal year for investments in emerging technology businesses (unless credits remain available after April 1st in any fiscal year). Currently the annual limit on credits is $3 million, and tax credits are not to be reserved for any investment made on or after July 1, 2019.1

2. Withholding on Pension and Annuity Payments

Current law permits Connecticut residents receiving pensions or annuities to instruct the payer to withhold Connecticut income tax. Effective January 1, 2018, each payer of pension and annuity distributions, including distributions from an employer pension, an annuity, a profit-sharing plan, a stock bonus, a deferred compensation plan, an individual retirement arrangement, an endowment or a life insurance contract, will be required to deduct and withhold Connecticut income tax from such distributions if the payer (i) maintains an office or transacts business in Connecticut, and (ii) makes payment of any amount taxable in Connecticut to a resident individual. The method of determining the amount to be withheld shall be the same as the method used by employers with respect to wages, except for "lump sum distributions". Connecticut resident individuals who are recipients of pension or annuity payments are now required to provide the payer with a completed Form CT-W4P. If the recipient does not provide a properly-completed Form CT-W4P, the payer must withhold at the highest marginal income tax rate (currently 6.99%). A "lump sum distribution" is also taxable at the highest marginal rate unless (i) any portion of the distribution previously was subject to tax, or (ii) the distribution is a rollover that is effected as a direct "trustee-to-trustee" transfer. A "lump sum distribution" is a payment from a payer to a resident payee of the payee's entire account balance, exclusive of any other tax withholding and any administrative charges and fees.2

3. Social Security Benefits

Beginning with the 2019 tax year, the income thresholds at which a taxpayer qualifies for a 100% Connecticut income tax exemption for his or her Social Security benefits are increased to (i) federal adjusted gross income of less than $75,000 (currently $50,000) for single filers and married couples filing separately, and (ii) federal adjusted gross income of less than $100,000 (currently $60,000) for married couples filing jointly and heads of household. A 75% exemption is generally available to those taxpayers with federal adjusted gross income equal to or greater than the applicable threshold.3

4. Delay of Teachers' Retirement System Exemption

Under prior law, a taxpayer with income from the state teachers' retirement system was entitled to an exemption equal to 10% of that income for the 2015 taxable year, 25% of that income for the 2016 taxable year, and 50% of that income for 2017 and future taxable years. The increase of the exemption from 25% to 50% has been delayed to 2019 and future taxable years (subject to the right of a taxpayer to claim the new exemption for pension and annuity payments described below).4

5. Pension and Annuity Exemption

A new exemption for pension and annuity income is phased in for taxpayers who are single filers, married people filing separately or heads of households with federal adjusted gross income of less than $75,000, and for married couples filing jointly with federal adjusted gross income of less than $100,000. The percentage of such income that is exempt is phased in as follows: 14% for the 2019 taxable year, 28% for the 2020 taxable year, 42% for the 2021 taxable year, 56% for the 2022 taxable year, 70% for the 2023 taxable year, 84% for the 2024 taxable year and 100% for 2025 and future taxable years.5

6. Sourcing of Income from Real Property

Under current law, a nonresident individual must pay Connecticut personal income tax on gains or losses from the sale or disposition of an interest in a partnership, limited liability company or Subchapter S corporation that owns real property that is located in Connecticut and that has a fair market value that equals or exceeds 50% of all of the assets of the entity on the date of sale or disposition of that nonresident individual's interest in that entity. The governing statute has been amended to provide that the sourcing rule applies if the relevant entity owns "directly or indirectly" such real property.6

7. Limitation on Property Tax Credit

For taxable years beginning on or after January 1, 2016, the maximum tax credit for property taxes paid continues to be limited to $200 per year, subject to certain Connecticut adjusted gross income limitations. However, for the 2017 and 2018 taxable years, the credit is further limited to only Connecticut residents who either (I) attain the age of 65 before the end of the applicable tax year or (ii) validly claim one or more dependents on their federal income tax returns.7

8. Reduction in Earned Income Tax Credit

Connecticut's earned income tax credit, which was to increase from 27.5% to 30% for the 2017 taxable year, has been reduced permanently to 23%.8

9. Organ Donation Deduction

A taxpayer who donates human bone marrow or all or part of a human liver, pancreas, kidney, intestine or lung to another person for organ transplantation during a taxable year beginning on our after January 1, 2017, may take a deduction from Connecticut taxable income of up to $10,000 in lost wages and medical, travel and housing expenses incurred by the taxpayer in connection with the donation.[9]

10. STEM Graduate Tax Credit

For taxable years commencing on or after January 1, 2019, an individual who receives, on or after January 1, 2019, a bachelor's, master's, or doctoral degree in science, technology, engineering, or a math-related field may claim a new $500 refundable tax credit for each of the first five years after graduation. In order to claim the credit, the taxpayer must be employed in Connecticut and either reside in Connecticut, or move to Connecticut within two years of graduation.10

11. Crumbling Foundations Assistance Fund

A Crumbling Foundations Assistance Fund has been established to help create a new captive insurance company, and provide assistance to homeowners with crumbling concrete foundations. The governing legislation provides that an individual shall be entitled to subtract from Connecticut adjusted gross income the amount of any financial assistance received from the Fund or paid to or on behalf of the owner of a residential building to the extent that such amount would be properly includable in gross income for federal income tax purposes.11

12. Foreign Entity Nonqualified Deferred Compensation

Effective for taxable years commencing on or after January 1, 2017, a taxpayer must include in Connecticut adjusted gross income any compensation required to be recognized under section 45 7A of the Internal Revenue Code of 1986, as amended ("Code"), that is attributable to services performed within Connecticut to the extent it is not otherwise properly includable in gross income for federal income tax purposes. In general, Code section 457A requires the inclusion of nonqualified deferred compensation from certain foreign corporations or...

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