Reminder: CT Fresh Start Initiative, Changes to Pension Withholding
Two recently enacted, Connecticut-specific tax initiatives – the Connecticut Fresh Start Program and the new withholding requirement on pension distributions – could have broad impact on many businesses operating in the state. CohnReznick had reported on some of this information in a prior tax alert; however, due to their potentially wide-ranging impact, we are revisiting these topics to encourage affected clients to become familiar with the nuances of each matter.
Fresh Start Initiative
On October 31, 2017, the Connecticut legislature adopted the fiscal year 2017/2018 and 2018/2019 biennial budget. As part of this budget, the state enacted the Connecticut Fresh Start Program”, which is a voluntary tax compliance initiative available to both individuals and businesses wishing to report their outstanding, unreported tax liabilities. The program applies to tax returns due before December 31, 2016.
In exchange for filing outstanding returns and paying tax liabilities, the 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 allow a limited look-back period (i.e., limit the scope of its review of prior year returns).
Taxpayers are ineligible for the program if they:
- Have received a bill;
- Are under audit;
- Are party to a closing agreement with DRS;
- Have made an offer of compromise that has been accepted by DRS;
- Have protested a determination of an audit; or
- Are a party to litigation against the Commissioner.
Qualified taxes (other than motor carrier road taxes) include the personal income tax, corporate business tax, business entity tax, sales and use tax, withholding tax, and gift tax. Applications must be completed online on the DRS’s website or at www.makeafreshstartct.com, and will be accepted through November 30, 2018.
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 state 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 an employer pension, an annuity, a profit-sharing plan, a stock bonus, a deferred compensation plan, an individual retirement arrangement (IRA), an endowment, or a life insurance contract.
The new withholding requirement on pension distributions received little fanfare, but affects many businesses. Because 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. The new legislation requires payers to calculate the amount of withholding on periodic payments in the same method used by employers when employers determine the amount to withhold from wages.
In the event a completed form CT–W4P is not provided by the employees, a 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 any administrative charges and fees, are taxable at the highest marginal personal income tax rate unless any portion of the lump sum distribution was previously taxed, or the lump sum distribution is a rollover through a direct trustee-to-trustee transfer.
See AN 2017(11), Revised Form CT-W4P for Connecticut Resident Recipients of Pensions and Annuity Distributions, for further guidance.
For more information, please contact Matt Nick, Director, State and Local Tax Services, at Matthew.Nick@CohnReznick.com or 860-271-7933.
This has been prepared for informational purposes, is general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without first obtaining professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.