Connecticut Governor M. Jodi Rell announced on September 1, 2009 that she will allow Connecticut budget bill (H6802) to become law without her signature, ending the longest budget crisis in the state’s history.  In general, Connecticut taxpayers should be mindful of the statutory changes below.
 
I.    Individual Tax Matters

Income Tax Rate Increase – for Tax Years beginning on or after January 1, 2009

The legislation increases income taxes for those with taxable incomes over:
- $1 million for joint filers;
- $800,000 for heads of households; and
- $500,000 for single filers and married people filing separately.
The legislation accomplishes the increase by adding a third, higher-income tax bracket and increasing the marginal tax rate for income in that bracket from 5.0% to 6.5%.  In addition, the flat income tax rate for trusts and estates has increased from 5.0% to 6.5%. 
 
Delay in Scheduled Income Tax Reductions for Single Filers

The legislation delays scheduled income tax reductions for single filers for three years.  This is accomplished by delaying scheduled increases in (1) their personal exemptions from tax and (2) income thresholds for phasing out their personal exemptions and credits. 
 
Current law has the maximum exemption for adjusted gross income (AGI) of single filers slated as $13,500 for 2009 (up from $13,000 in 2008) and scheduled to increase in three more annual steps to $15,000 for 2012.  (The exemption phases out for incomes over twice the exemption amount in a given year.)  The new law scraps this plan by maintaining the $13,000 personal exemption (and the phase-out threshold) for three more years through 2011 and then beginning the annual increases in 2012. 
The legislation additionally delays by three years the scheduled increases in income ranges that allow single filers to qualify for personal credits against their income tax.  Personal credits range from 1% to 75% of tax and depend on the taxpayer’s AGI.  Certain filers with AGI surpassing specified thresholds do not qualify for any credit. 

II. Corporate Tax Matters

Tax Surcharge – for Tax Years beginning on or after January 1, 2009

Connecticut has enacted an additional 10% corporation tax surcharge for income years beginning in 2009, 2010 and 2011.  Corporations with gross income of less than $100 million are not subject to the tax nor are companies whose tax liability does not exceed the $250 minimum tax.

Economic Nexus - for Tax Years beginning on or after January 1, 2010

The state has adopted an economic presence analysis for determining nexus.  Therefore, corporations that purposefully direct business toward the state without physical presence may now be subject to the corporate income tax.

Nonconformity to Internal Revenue Code Sec. 199 - for Tax years beginning on or after January 1, 2009

The legislation disallows the deduction for Domestic Production Activities under U.S. Internal Revenue Code Sec. 199 for both corporate and individual taxpayers.

III.  Estate and Gift Matters - for Deaths and Gifts on or after January 1, 2010

The legislation amends the state’s estate and gift tax which currently applies to estates and gifts in excess of $2 million.  The legislation increases the threshold value of an estate or gift subject to tax to $3.5 million and reduces the marginal estate and gift tax rates by 25%.  The legislation also eliminates the requirement that, once an estate or gift’s taxable value exceeds the taxable threshold, the tax applies to the entire value; instead, the tax applies to the marginal value over the threshold of $3.5 million.

IV.  Tax Settlement Initiative