Connecticut Governor Ned Lamont recently signed a comprehensive two-year state budget bill which includes significant tax changes to provide relief to middle-class households. The bill includes the largest personal income tax cut in the state’s history, along with several modifications to corporate business tax and the CT pass-through entity tax. Let’s explore the highlights of this legislation and its potential impact on taxpayers.
Income Tax Adjustments
In the 2024 tax year, HB 6941 adjusts the income tax structure in the following ways:
- Reduction in Marginal Rates: The bill lowers the bottom two marginal income tax bracket rates for all filers. Single and married filing separately taxpayers will see a decrease from 3% to 2% on the first $10,000 in taxable income, while married filing jointly and head of household filers will see the same decrease in the first $20,000 in taxable income. There will also be a cut from 5% to 4.5% on the next $40,000 earned by single and married filing separately taxpayers and the same decrease on the next $80,000 earned by married filing jointly and head of household taxpayers.
- Expanded Exemptions for Pensions and Annuities: The exemption eligibility on qualifying pensions and annuities will be extended to taxpayers with federal AGI ranging from $75,000 to $100,000 (single, married filing separately & head of household), and $100,000 to $150,000 (married filing jointly). The deductions will be phased out entirely at $100,000 or $150,000, depending on the filing status.
- Increased Earned Income Tax Credit: The earned income tax credit increases to 40% of the federal credit, up from the previous 30.5%. This change will be effective for taxable years beginning on or after January 1, 2023.
Corporate Business Tax Adjustments
Several modifications were made to corporate business taxes too, including:
- Extension of Corporate Tax Surcharge: The 10% corporate tax surcharge will be extended for three additional years, beginning January 1, 2023.
- Film and Digital Media Production Tax Credits: Beginning on January 1, 2024, the amount of credits claimed against the sales tax for film and digital media production will increase from 78% to 92% for 2024 and 2025.
- Human Capital Investment Credit: The human capital investment credit increases from 5% to 10% for most eligible investments. Corporations can now use the 25% human capital investment credits to reduce up to 70% of their tax liability, compared to the previous 50.01%. Additionally, eligible childcare-related expenditures will receive a 25% credit.
Pass-through Entity Tax Amendments
HB 6941 introduces modifications to the pass-through entity tax as follows:
- Optional PET: Starting January 1, 2024, the PET becomes optional, and those opting to pay the tax must notify the Department of Revenue Services annually by the due date of their return.
- Alternative Calculation Method: The standard calculation for the PET is eliminated, and all returns must now follow the alternative method. This change provides different treatment for CT residents versus nonresidents and eliminates the option for pass-through entities to file a combined return with commonly owned entities.
- Nonresident Member Tax: Pass-through entities are now required to file an income tax return and pay taxes on behalf of any nonresident member for whom the business is their only source of CT income.
And finally, the diesel tax rate will be frozen at 49.2¢ per gallon, effective July 1, 2023, and an excise tax of 15¢ per gallon will be imposed on aviation fuel, effective July 1, 2025.