Connecticut’s Response to the Tax Cuts and Jobs Act
Connecticut recently enacted new tax law due to the federal tax reform.
Here are the highlights:
1. A pass-through entity tax aimed to help mitigate the $10,000 state, local, and property tax (SALT) limit. This tax is effective for taxable years beginning on or after January 1, 2018 for partnerships (nonpublic), and S corporations. The tax will be 6.99% (highest personal tax rate) on income derived or connected with sources within Connecticut and will be due by March 15th (due date change from April 15th). The tax will be deducted on the entities federal tax return. Members/Shareholders will receive a refundable credit equal to 93.01% of their pro-rata share of the tax that is paid. The required annual payment is the lesser of 90% of the current year tax, or 100% of the prior year tax (if in the preceding year a return was filed). There are four required estimated installments (4/15, 6/15, 9/15 & 1/15). The Connecticut Department of Revenue Services (DRS) issued additional guidance on estimated payments for 2018. Since the tax was enacted after April 15th, entities can comply by either:
- Making a catch-up contribution with the June 15th payment
- Making the June, September and January payments each equal to 22.50% of the 2018 tax liability with the remainder due by March 15th
- Annualizing the payments for the taxable year.
The DRS will also allow any individual 1040 estimate payments made for April, June or September to be recharacterized as entity payments. Members/shareholders need to analyze whether an adjustment is needed to both their individual quarterly estimates, and wage withholding.
2. Depreciation limitations have been put into place. Effective 1/1/18 for individuals and corporations, 80% of Section 179 expense is disallowed. 25% of the disallowed portion will be taken as an expense in the next four years (in effect 20% over 5 years). Effective 9/27/17 for individuals receiving pass-through income, they must addback the bonus in the current year, and then deduct 25% for the next four years.
3. There is a phase in of the estate and gift tax threshold to the federal threshold over 3 years.
The CT estate tax and CT gift tax is 0% if under:
- 2018 – $2,600,000
- 2019 - $3,600,000
- 2020 - $5,100,000
- 2021 - $7,100,000
- 2022 - $9,100,000
4. Another way CT is trying to mitigate the $10,000 SALT limit is by allowing the issuance of a property tax credit for a charitable donation. Municipalities annually would need to approve the credit by a vote of its legislative body. Individuals would receive a residential property credit that is the lesser of the amount of property tax owed, or 85% of a charitable contribution made to a “community supporting organization”. The contribution would be made in the year before the credit was issued, and the taxpayer would have to file an application for the tax credit. There is doubt as to whether IRS will allow this because in general tax payers aren’t allowed to deduct any charitable donations in which they receive a benefit.
The IRS recently issued a notice that they will be issuing proposed regulations that will address the deductibility of SALT for federal purposes. This could affect the treatment of #1 and #4 above.
“An Act Concerning Connecticut’s Response to Federal Tax Reform”
Guidance on 2018 Estimated Payments for the Newly Enacted Pass-Through Entity Tax
Contact Us With Your Questions
If you have questions or need help with your estimated tax payments please contact The Innovative CPA Group at 203-489-0612.