2022 Connecticut Tax Developments – Withholding Tax

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This newsletter summarizes enacted Connecticut tax legislation, court decisions issued, and administrative guidance issued by the Connecticut Department of Tax Services (DRS) during calendar year 2022. If you have any questions about our state and local tax practice group , contact a member new changes to tax law and how they may affect you and your business.

Personal Income Tax

I. Legislation

Exemption from pensions and annuities. The phase-in of the general exemption of pensions and annuities from Connecticut taxable income has been accelerated. Beginning in tax year 2022, income-eligible taxpayers can deduct 100% of their eligible pension and annuity income from their Connecticut taxable income. Under previous law, the exemption was phased in between 2019 and 2025. This phase-in does not affect the phase-out of taxation of IRA distributions. Conn. General Stat. §12-701, as amended by Conn. Pub. Law no. 22-118 §410 (effective May 26, 2022).

Personal income tax credit for property taxes paid. Beginning in 2022, residents who own motor vehicles or homes in Connecticut will receive a property tax credit of up to $300, up from the previous credit of $200. Conn. General Stat. §12-704c, as amended by Conn. Pub. Law no. 22-118 §408 (effective May 26, 2022). Additionally, eligibility for the property tax credit is expanded to all adults within the current income limits ($109,500 for single filers and $130,500 for joint filers). Previously, the property tax credit was limited only to those over 65 or those with dependents. Conn. General Stat. §12-704c, as amended by Conn. Pub. Law no. 22-118 §408 (effective May 26, 2022).

Credit for income tax. Connecticut’s earned income tax credit was originally scheduled to increase from 30.5% to 41.5% for tax years beginning on or after January 1, 2023. Conn. January Stat. §12-704e, as amended by Conn. Pub. Law no. 22-118 §409 (effective July 1, 2022). However, subsequent legislation reversed the increase, so the percentage remains at 30.5% for fiscal years beginning on or after Jan. 1, 2023. Conn. January Stat. §12-704e, as amended by Conn. Pub. Law no. 22-146 §31 (effective July 1, 2022).

Child tax allowance. Connecticut residents were eligible to receive a child tax credit in this number up to a maximum of $750 ($250 per child up to three children) if the resident met certain income thresholds and applied for to the Department of Finance before July 31. 2022. Conn. Pub. Law no. 22-118 §411 (effective May 26, 2022).

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Credit for the birth of Stillborn. Taxpayers are allowed a personal income tax credit of $2,500 for the birth of a stillborn child, as long as that child has been listed as a dependent on the federal income tax return taxpayer’s income. The credit is allowed for the taxable year for which the Office of Vital Records of the Department of Public Health issues a stillbirth certificate. Conn. Pub. Law no. 22-118 §412 (effective July 1, 2022 and applicable to taxable years beginning on or after January 1, 2022).

Composite Income Statement of non-residents. Pass-Through Entities (“PEs”) may elect, annually, to remit compound income tax on behalf of their non-resident members. The pass-through entities must (1) make this election before the due date or extended due date for filing their PE tax returns and (2) file the composite returns subject to any requirements and conditions that the Commissioner of DRS prescribe in the declaration form and the instructions. . The PE making this election must remit to DRS the compounded income tax, plus applicable interest and penalties, on behalf of each individual non-resident member. The composite income tax owed on behalf of each nonresident individual member is (1) each member’s distributive share of the PE’s Connecticut source income multiplied by 6.99%, less (2) the tax credit of PE of each member. If the nonresident member’s only source of Connecticut income is from one or more elected PEs, the composite income tax return and payment remitted by the PE on its behalf meet the filing requirements and payment of Connecticut income tax. Nonresident members are not exempt from filing a separate Connecticut income tax return if they have Connecticut source income from sources other than the elected PE. Conn. Pub. Act. no. 22-117, §16 (effective May 27, 2022).

Responsible Penalty for retentions. Previously, any person required to collect, account for, and pay Connecticut personal income tax who willfully fails to do so, or who attempts to evade or evade the tax or its payment, is liable to a penalty equal to the amount of tax evaded. or not collected, accounted for or paid. The bill also makes them liable for any penalties or interest attributable to those actions. The penalty amount for which a person may be personally liable will be collected in accordance with applicable state income tax collection laws. Conn. General Stat. §12-736, as amended by Conn. Pub. Act. no. 22-117, §1 (effective May 27, 2022).

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Income tax refund for changes made by another jurisdiction. Taxpayers claiming a Connecticut income tax credit must file an amended return for any tax year in which tax officials or courts of qualified jurisdiction have issued an assessment against the taxpayer for failure to file a income tax return in the jurisdiction. If a taxpayer files an amended return as a direct result of paying such an assessment to a qualified jurisdiction, the taxpayer is entitled to a refund of any overpayment of Connecticut income tax only if the amended return is filed within of the five years following the original Connecticut income. the tax had to be declared. Amended returns filed more than five years after that date are not eligible for a refund. Conn. General Stat. §§12-704(b)(1) and 12-732(b), as amended by Conn. Pub. Act. no. 22-117, §§2-3 (effective May 27, 2022).

Limitation of refund claims for closed audit periods. Taxpayers must submit refund requests within six months of the date on which the results become final by operation of law or by exhaustion of all available administrative and judicial rights of appeal, whichever occurs first. later for the tax periods for which the results of any DRS audit, investigation or civil investigation. examination or re-examination have become final. Conn. Pub. Act. no. 22-117, §5 (effective May 27, 2022).

Exclusion from Connecticut taxable income. For fiscal year 2022, Connecticut residents may deduct the amounts of Connecticut income tax paid under the 2020 Earned Tax Credit Enhancement Program from funding allocated to the state through the Fund ‘Coronavirus relief established under the Coronavirus Aid, Relief and Economic Security Act, PL. 116-136, and the 2021 earned income tax credit enhancement program from state-appropriated funding under section 9901 of subtitle M of title IX of the American Rescue Plan Act of 2021, PL 117 -2. Conn. General Stat. §12-701, as amended by Conn. Pub. Law no. 22-118 §410 (effective May 26, 2022).

II. Jurisprudence

Taxation of Stock Options and Restricted Stock Units. In John P. Costas et. at the. v. Commissioner of Revenue Services, 213 Conn. App. 719 (2022), the Court of Appeals had to determine the proper assessment of taxes against a taxpayer with respect to certain stock options and restricted stock units granted to the taxpayer by his employer as compensation for services which he performed both in Connecticut and New York. On appeal, the taxpayer contended that the trial court incorrectly granted summary judgment in favor of the commissioner because the lower court misconstrued and applied §§ 12-711(b)-17 and 12-711 ( b)-18 of the Connecticut Regulation. State agencies (governing the tax credit available to a Connecticut taxpayer for taxes paid to another state on compensation derived from the acquisition of restricted stock and the exercise of stock options, respectively, for services performed both in Connecticut as in another state). The parties agreed that, in accordance with the regulations, the appropriate apportionment for the purposes of the tax deduction is a function of the ratio of the total compensation received during the “grant period to the exercise” (in the case of the options on stock) and the “vest period contribution” (in the case of restricted stock) for services performed in New York (the numerator of the ratio) and the total compensation received during those periods for services performed in Connecticut, New York and any other place (the denominator of the ratio). The Commissioner interpreted the regulations to require the computation of total compensation received during the periods, including deferred compensation that was received in those periods for services previously rendered. Instead, the taxpayer asserted that the proration calculation should include only compensation received for services actually performed during those periods and not deferred compensation previously earned but received in those periods as a result of the exercise of options on shares and the admission of restricted shares. The Court of Appeal held that the Commissioner’s calculation was imposed by the plain language of the regulations and, moreover, the methodology was consistent with the basic income tax principle that compensation is included in the gross income in the year received, and not in the year earned and, therefore, upheld the judgment of the court of appeals.

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The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your specific circumstances.

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