Connecticut budget changes: Large personal income tax cut

Starting with the 2024 tax year, the bill:

• Reduces the bottom two marginal income tax bracket rates for all filers from:

1) 3% to 2% therefore lowering tax on the first $50,000 in taxable income for single (S) and married filing separately (MFS) filers

2) 5% to 4.5% therefore lowering tax on the first $100,000 of income for joint (MFJ) and $80,000 for heads of household (HOH). Furthermore, the rate reduction is recaptured for taxpayers with income exceeding $105,000 (S and MFS), $168,000 (HOH), or $210,000 (MFJ joint filers).

• Extends eligibility for the exemptions for qualifying pensions and annuities to taxpayers with federal AGI of $75,000 to $100,000 (S, MFS, HOH), and $100,000 to $150,000 (MFJ); The deductions are fully phased out at $100,000 or $150,000 as applicable, according to the bill.
• The bill increases the earned income tax credit to 40% of the federal credit (previously 30.5%) for taxable years beginning on or after Jan. 1, 2023.

Effective Jan. 1, 2024, the bill:

• Makes the pass-through entity tax (PET) optional rather than mandatory. Entities choosing to pay the tax must annually notify the DRS of their election. The election is due on the due date or extended due date of the return (if extension was made in a timely manner).
• Eliminates the PET’s standard calculation of the tax, making all returns follow the alternative method.
• This eliminates calculation of PET on corporations and provides different treatment for CT residents versus nonresidents.
• Eliminates the option for PEs to file a combined return with one or more commonly owned pass-through entity or entities.
• Reimposes a requirement that pass-through entities file an income tax return and pay tax on behalf of any nonresident member for whom the business is the only source of CT income.
• Note that although Governor Lamont previously proposed restoring the PET credit to 93.01%, that change was not included in the final budget. Therefore, the PET credit remains at 87.5%.

• The 10% corporate tax surcharge is extended for three years for income years beginning Jan. 1, 2023.
• Effective Jan. 1, 2024, the human capital investment credit:
  • Is increased from 5% to 10% for most eligible investments and 25% for eligible childcare-related expenditures, according to the bill.
  • Makes donations or capital contributions to nonprofits for establishing childcare centers for children residing in the community an eligible investment.
  • Allows corporations to use the 25% human capital investment credits to reduce up to 70% of their tax liability, rather than 50.01%.
• The amount of the film and digital media production tax credits claimed against the sales tax for 2024 and 2025 rises from 78% to 92%, effective Jan. 1, 2024.
• Certain telecommunication corporations who own LLCs are allowed to claim the fixed capital investment tax credit for amounts the LLC invested in qualifying fixed capital for income years starting on or after July 1, 2025, according to the bill.
• Effective Jan. 1, 2023, the angel investor tax credit for cannabis businesses will be eliminated. However, expenses disallowed at the federal level under the controlled substances rules are permitted as state deductions.
• Nonprofits and individuals may claim historic homes rehabilitation credits issued on or after Jan. 1, 2024. Nonprofits may carry forward any unused credits for four years. Excess credits claimed against the personal income tax is refundable.
• Effective Jan. 1, 2024, a new credit is established for certain pre and post Broadway theater productions.
• An educational scholarship donation credit is established for both corporations and individuals effective Jan. 1, 2024.

• The diesel tax rate is frozen at 49.2¢ per gallon effective July 1, 2023.
• An excise tax is imposed on aviation fuel of 15¢ per gallon effective July 1, 2025.

With Connecticut projected to have a $1.35 billion surplus, it is not surprising that the new budget provides welcome reductions in taxes on individuals and increased credits for corporations. Although we had discussed many of these provisions with the state prior to the bill's passage, the modifications to the pass-through entity tax were not discussed. It’s important for businesses to review these changes to consider their CT tax implications. If there are any questions as to how HB 6941 may impact your clients, please contact us.

Matthew Nick, Director, National Tax - SALT

959.200.7133

Cynthia Galamgam, Senior Manager, National Tax - SALT

959.200.7239