SN 98(4)

Summary of 1997 Legislation Affecting the
Connecticut Income Tax

PURPOSE: This Special Notice summarizes legislation enacted in 1997 that affects the Connecticut income tax.

STATUTORY AUTHORITY: 1996 Conn. Pub. Acts 175; 1997 Conn. Special Acts 2; 1997 Conn. Pub. Acts 70; 1997 Conn. Pub. Acts 81; 1997 Conn. Pub. Acts 224; 1997 Conn. Pub. Acts 243; 1997 Conn. Pub. Acts 286; 1997 Conn. Pub. Acts 309; and 1997 Conn. Pub. Acts 322.

EFFECTIVE DATES: The effective dates of legislative changes affecting the Connecticut income tax are noted herein.

EFFECTIVE FOR TAXABLE YEARS BEGINNING ON OR AFTER JANUARY 1, 1997:

EFFECTIVE MAY 27, 1997

Limited Liability Companies. 1997 Conn. Pub. Acts 70 authorizes single member limited liability companies (LLCs) and allows an assignee thereof to become a member if and to the extent the member gives him this right.

Estimated Income Tax. 1997 Conn. Pub. Acts 81, §§1 and 2, raises the threshold for the penalty for underpayment of estimated income tax from $200 to $500. These provisions amend Conn. Gen. Stat. §12-722 (j).

Credit for Income from Intangibles. 1997 Conn. Pub. Acts 286, §4, amends Conn. Gen. Stat. §12-704 by allowing a statutory resident to claim a credit for taxes paid to another jurisdiction on income from intangible personal property, as long as the tax is imposed by and paid to the domiciliary jurisdiction and as long as the laws of the other jurisdiction allow a comparable credit to individuals who are domiciled in Connecticut but are statutory residents of the other jurisdiction. Connecticut-sourced income remains taxable to Connecticut. A statutory resident is an individual who is domiciled in another state but has a permanent place of abode in Connecticut and is in Connecticut for more than 183 days in a taxable year.

Farmers and Fishermen. 1997 Conn. Pub. Acts 286, §5, amends Conn. Gen. Stat. §12-722 to modify the current estimated tax provisions for farmers and fishermen as defined in §6654(i) of the Internal Revenue Code to conform to federal estimated tax provisions. The new law requires one estimated payment installment due and payable January 15 of the following taxable year, in an amount equal to 66 2/3% of the tax shown on the current year's return or 100% of the tax shown on the preceding year's return. This legislation added another subdivision to Conn. Gen. Stat. §12-722 (m), providing that no penalty for underpayment of estimated tax shall be imposed under Conn. Gen. Stat. §12-722(a) if the farmer or fisherman files a return and pays the full amount due by March 1 of the following taxable year.

Property Tax Credit. 1997 Conn. Pub. Acts 309, §7, amends Conn. Gen. Stat. §§12-704 (a) and (b) to create a new credit against income tax, for Connecticut residents, for a portion of property tax paid on a primary residence or on a motor vehicle. Regardless of filing status, the credit may not exceed $215 for taxable years beginning on or after January 1, 1997, and $285 for taxable years beginning January 1, 1998 (see 1997 Conn. Pub. Acts 322, §4). The property tax must be due and paid during the taxpayer's taxable year. The maximum credit is reduced, but not below $100, as Connecticut adjusted gross income increases (see Property Tax Credit Phaseout). The credit is allowed to any person leasing a motor vehicle pursuant to a written agreement for a term of more than 1 year, if the lessee was in lawful possession of the vehicle when the property tax became due. The lessor is not entitled to the credit. The credit may not reduce tax liability to less than zero.

Property Tax Credit Phaseout

Range of Income Taxed at 3%. 1997 Conn. Pub. Acts 322, §§5 and 7, increases the amount of Connecticut taxable income subject to the lower tax rate of 3%. (See also 1997 Conn. Pub. Acts 309, §8.)

Income Tax Rate Changes Effective 1/1/97

CHECK-OFFS

Breast Cancer Research and Education Account and Checkoff Box. 1997 Conn. Pub. Acts 286, §§6 and 7, amends Conn. Gen. Stat. §12-743 to establish the Breast Cancer Research and Education Account and checkoff. These provisions allow taxpayers to contribute any part of their income tax refund to the new breast cancer research and education account and requires that income tax returns be revised to incorporate a check-off box for it.

Safety Net Services Account. 1997 Conn. Pub. Acts 2, §§4 and (June 18 Spec. Sess.), amends Conn. Gen. Stat. §12-743 to establish a Safety Net Services Account to be administered by the Department of Social Services and provides for a check-off box on the income tax return so that taxpayers may contribute all or part of their income tax refund to that account.

Nonresident and Nexus Investigation Project. 1997 Conn. Pub. Acts 309, §10, requires the Commissioner of Revenue Services to report to the Finance Committee on the agency's Nonresident and Nexus Investigation Project, covering the two-year period from July 1, 1997 to July 1, 1999. The Commissioner is required to issue interim reports on April 1, 1998, and April 1, 1999, and final reports for the fiscal years ending June 30, 1998, and June 30, 1999, detailing the amount of additional sales and use, corporation and Connecticut income tax revenue attributable to the project.

Tax on S Corporations. 1996 Conn. Pub. Act. 175, §1, amends Conn. Gen. Stat. §12-217 by phasing out the corporation business tax on the net income of S corporations over five years, starting with the income year beginning during 1997. (See below for the decreasing percentages of S corporation's net income, as defined in Conn. Gen. Stat. §12-217 (c) (1), as amended, that are taxable over the next five years.) Nonseparately stated income that is not subject to the corporation business tax will pass through to the shareholder and be subject to the Connecticut income tax. Despite the phaseout, S corporations are still subject to the minimum tax under Conn. Gen. Stat. §12-219 a (which cannot be less than $250).

Percentage of S Corporation Net Income Subject to Corporation Business Tax

Credit Against Alternative Minimum Tax. 1997 Conn. Pub. Acts 286, §1, amends Conn. Gen. Stat. §12-700a(d) to allow a greater portion of the credit to be used in the current taxable year.

Adjusted Net Connecticut Minimum Tax. 1997 Conn. Pub. Acts 286, §2, amends Conn. Gen. Stat. §12-701(a)(27) by changing the calculation of adjusted net Connecticut minimum tax under Conn. Gen. Stat. §12-701(a)(27)(B) where the Connecticut minimum tax is calculated under Conn. Gen. Stat. §§12-701(a)(26)(A)(ii) or (B)(ii). This provision ensures that alternative minimum taxpayers credits are limited to the amount of minimum tax they actually pay.

Definitions of Partner and Partnership. 1997 Conn. Pub. Acts 286, §3, amends Conn. Gen. Stat. §12-701(a) to define the partner and partnership by adding new subdivisions (33) and (34) to 12-701(a). Conn. Gen. Stat. §12-701(a)(33) provides that partnership means a partnership as defined in 26 U.S.C. §7701(a)(2) and the regulations adopted thereunder and that any references to partnership in chapter 229 (or any regulations adopted thereunder) include a limited liability company that is treated as a partnership for federal income tax purposes. Conn. Gen. Stat. §12-701(a)(34) provides that partner means a partner as defined in 26 U.S.C. §7701(a)(2) and the regulations adopted thereunder and that any references to partner in Chapter 229 (or any regulations adopted thereunder) include a member of a limited liability company that is treated as a partnership for federal income tax purposes. Individual-owned single member limited liability companies that elect to be treated as sole proprietorships are not required to file Form CT-1065, Connecticut Partnership Income Tax Return.

Technical Corrections. 1997 Conn. Pub. Acts 243, §43 amends Conn. Gen. Stat. §12-733 to allow an income tax deficiency assessment to be made within 6 years after the due date of an income tax return, or the date of filing, whichever is later, wherever the Connecticut adjusted gross income of an individual (or the Connecticut taxable income of a trust or estate) has been underreported by more than 25%.

1997 Conn. Pub. Acts 243, §44, amends Conn. Gen. Stat. §12-736 to delete obsolete references to declarations of estimated tax in the Income Tax Act.

EFFECTIVE JULY 1, 1997:

College Savings Account Program. 1997 Conn. Pub. Acts 224 requires the State Treasurer to establish a College Savings Account Program, allowing taxpayers to take advantage of a 1996 change to federal tax law which postpones taxation of interest earned on investments in a qualified state tuition program until earnings are distributed and allows them to be taxed at the beneficiary's rate. The act provides that the property of the trust shall be exempt from all taxation by the state and all of its subdivisions.

Use Tax Filing. 1997 Conn. Pub. Acts 243, §6, amends Conn. Gen. Stat. §12-39a to allow individuals who owe use tax to file on the next succeeding day after a Saturday, Sunday or legal holiday, when April 15 falls on a Saturday, Sunday or legal holiday. This provision accommodates taxpayers who use the Connecticut income tax return to report their purchases subject to the use tax.

Offset of Refunds Against Overdue Municipal Obligations. 1997 Conn. Pub. Acts 309, §16, amends Conn. Gen. Stat. §12-39g to allow refunds to taxpayers to be offset by overdue municipal obligations, where the Department and the municipality have entered into an offset agreement.

Property Tax Credit. 1997 Conn. Pub. Acts 309, §22, amends Conn. Gen. Stat. §§12-704a and 12-704b to repeal existing credits under 12-704a (tax credit for personal property taxes paid on motor vehicles) and 12-704b (tax credit for portion of property tax paid on primary residence). See also 1997 Conn. Pub. Acts 309, §7.

Income Tax Withholding. 1997 Conn. Pub. Acts 322, §6, requires that prior to July 1, 1998, income tax withholding and estimated tax be computed without regard to the rate established in Conn. Gen. Stat. §§12-700(a)(3) or (4). Section 6 also provides that the Department will issue new withholding tables that will take effect on July 1, 1998. These provisions amend Conn. Gen. Stat. §§12-700b, 12-700 (a)(3) and (4), 12-705, and 12-722.

EFFECTIVE FOR TAXABLE YEARS BEGINNING ON OR AFTER JANUARY 1, 1998:

Income Tax Rate Changes

Property Tax Credit. 1997 Conn. Pub. Acts 322, §4 increases the maximum amount of the property tax credit to $285 for taxable years beginning January 1, 1998.

Social Security Benefits. 1997 Conn. Pub. Acts 309, §9, reduces the amount of social security income subject to Connecticut income tax, by increasing the subtraction modification for social security benefits.

The amount that should be subtracted from federal adjusted gross income is the difference between:

1. the amount of Social Security benefits includable for federal income tax purposes under §13215 of the Omnibus Budget Reconciliation Act of 1993; and
2. 50% of the amount of such Social Security benefits includable for federal income tax purposes under the Internal Revenue Code of 1986 prior to August 10, 1993. These provisions amend Conn. Gen. Stat. §12-701.

EFFECTIVE FOR TAXABLE YEARS BEGINNING ON OR AFTER JANUARY 1, 1999:

Income Tax Rate Changes

EFFECT ON OTHER DOCUMENTS: No other documents are affected.

EFFECT OF THIS DOCUMENT: A Special Notice (SN) is a document that, in response to newly enacted or amended Connecticut or federal laws or in response to newly released judicial decisions, announces a new Department position, policy or practice affecting the tax liability of taxpayers.

FOR FURTHER INFORMATION: If you have questions about Connecticut taxes, please call the Department of Revenue Services during business hours, Monday through Friday:

• 860-297-5962 (Hartford calling area or from out-of-state); or
• 1-800-382-9463 (toll-free from within Connecticut)

Telecommunications Device for the Deaf (TDD/TT) users only, please call 860-297-4911 during business hours.

SN 98(4)
Income Tax
1997 Legislative Changes
Issued: 1/23/98