This newsletter summarizes Connecticut tax legislation enacted, court decisions rendered, and administrative guidance published by the Connecticut Department of Revenue Services (DRS) during calendar year 2022. Please contact a member of our State and Local Tax Practice Group if you have any questions regarding the new tax law changes and how they may affect you and your business.

Personal Income Tax

I. Legislation

Pension and Annuity Exemption. The phase-in of the general pension and annuity exemption from Connecticut taxable income has been accelerated. Beginning with the 2022 tax year, income-eligible taxpayers may deduct 100% of their qualifying pension and annuity income from their Connecticut taxable income. Under prior law, the exemption phased-in gradually between 2019 and 2025. This phase-in does not impact the planned phase-out of the taxation of IRA distributions. Conn. Gen. Stat. §12-701, as amended by Conn. Pub. Act No. 22-118 §410 (effective May 26, 2022).

Personal Income Tax Credit for Property Taxes Paid. Beginning in 2022, residents that own motor vehicles or homes in Connecticut will receive a property tax credit of up to $300, which is increased from the prior credit of $200. Conn. Gen. Stat. §12-704c, as amended by Conn. Pub. Act No. 22-118 §408 (effective May 26, 2022). In addition, eligibility for the property tax credit is expanded to all adults within current income limits ($109,500 for single filers and $130,500 for joint filers). Previously, the property tax credit was limited to only those over the age of 65 or those with dependents. Conn. Gen. Stat. §12-704c, as amended by Conn. Pub. Act No. 22-118 §408 (effective May 26, 2022).

Earned Income Tax Credit. The Connecticut 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. Gen. Stat. §12-704e, as amended by Conn. Pub. Act No. 22-118 §409 (effective July 1, 2022). However, subsequent legislation rescinded the increase so the percentage remains at 30.5% for tax years beginning on or after January 1, 2023. Conn. Gen. Stat. §12-704e, as amended by Conn. Pub. Act No. 22-146 §31 (effective July 1, 2022).

Child Tax Rebate. Connecticut residents were eligible to receive a In this issue... child tax rebate of up to a maximum of $750 ($250 per child up to three children) if the resident met certain income thresholds and applied to the Department of Revenue by July 31, 2022. Conn. Pub. Act No. 22- 118 §411 (effective May 26, 2022).

Credit for Birth of Stillborn. Taxpayers are allowed a credit against their personal income tax in the amount of $2,500 for the birth of a stillborn child, provided such child would have been listed as a dependent on the taxpayer's federal income tax return. The credit is allowed for the taxable year for which a stillborn certificate is issued by the State of Vital Records Office of the Department of Public Health. Conn. Pub. Act No. 22-118 §412 (effective July 1, 2022, and applicable to taxable years commencing on or after January 1, 2022). 

Nonresident Composite Income Tax Returns. Pass-through entities ("PE") may elect, on an annual basis, to remit composite income tax on behalf of their nonresident members. The pass-through entities must (1) make this election by the due date or extended due date for filing their PE tax returns and (2) file the composite returns subject to any requirement and conditions the DRS commissioner prescribes in the return form and instructions. The PE that makes this election must remit to DRS the composite income tax, plus any applicable interest and penalties, on behalf of each nonresident individual members. The composite income tax due 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%, minus (2) each member's PE tax credit. If the only Connecticut source income for the nonresident member is from one or more electing PEs, the composite income tax return and payment remitted by the PE on his or her behalf satisfies his or her Connecticut income tax filing and payment requirements. Nonresident members are not excused from filing a separate Connecticut income tax return if he or she has Connecticut source income from sources other than the electing PE. Conn. Pub. Act. No. 22-117, §16 (effective May 27, 2022).

Responsible Party Penalty for Withholding Tax. Previously, anyone required to collect, truthfully account for, and pay Connecticut personal income tax who willfully fails to do so, or who willfully attempts to evade or defeat the tax or its payment, is liable for a penalty equal to the amount of tax evaded or not collected, accounted for, or paid. The bill additionally makes them liable for any penalty or interest attributable to these actions. The penalty amount for which a person may be personally liable will be collected according to existing state income tax collection laws. Conn. Gen. Stat. §12-736, as amended by Conn. Pub. Act. No. 22-117, §1 (effective May 27, 2022).

Income Tax Refunds Due to Changes Made by Another Jurisdiction. Taxpayers who claim a Connecticut income tax credit must file an amended return for any tax year in which the qualifying jurisdiction's tax officials or courts issued an assessment against the taxpayer for failing to file an income tax return with the jurisdiction. If a taxpayer files an amended return as a direct result of paying such an assessment to a qualifying jurisdiction, the taxpayer is eligible for a refund for any resulting Connecticut income tax overpayment only if the amended return is filed within five years after the original Connecticut income tax return was due. Amended returns filed more than five years after this date are ineligible for a refund. Conn. Gen. 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 on Claims for Refunds for Closed Audit Periods. Taxpayers must file refund claims within six months after the date the results become final by operation of law or by exhaustion of all available administrative and judicial rights of appeal, whichever is later for tax periods for which the results of any DRS civil audit, investigation, examination, or reexamination have become final. Conn. Pub. Act. No. 22-117, §5 (effective May 27, 2022).

Exclusion from Connecticut Taxable Income. For the 2022 tax year, Connecticut residents may subtract from Connecticut income tax amounts paid under the 2020 Earned Income Tax Credit enhancement program from funding allocated to the state through the Coronavirus Relief Fund established under the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, and the 2021 Earned Income Tax Credit enhancement program from funding allocated to the state pursuant to Section 9901 of Subtitle M of Title IX of the American Rescue Plan Act of 2021, P.L. 117-2. Conn. Gen. Stat. §12-701, as amended by Conn. Pub. Act No. 22-118 §410 (effective May 26, 2022).

II. Case Law

Taxation of Stock Options and Restricted Stock Units. In John P. Costas et. al. v. Commissioner of Revenue Services, 213 Conn. App. 719 (2022), the Appellate Court 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 he performed both in Connecticut and in New York. On appeal, the taxpayer claimed that the trial court incorrectly granted summary judgement in favor of the Commissioner because the lower court misinterpreted and misapplied §§ 12-711(b)-17 and 12-711(b)-18 of the Regulations of Connecticut State Agencies (governing the tax credit available to a Connecticut taxpayer for taxes paid to another state on compensation derived from the vesting of restricted stock and the exercise of stock options, respectively, for services performed both in Connecticut and in another state). The parties agreed that under the regulations, the proper apportionment for tax credit purposes is a function of the ratio between the total compensation received during the "grant-to-exercise period" (in the case of stock options) and the "grant-to-vest period" (in the case of restricted stock) for services performed in New York (the ratio's numerator), and the total compensation received during those periods for services performed in Connecticut, New York and anywhere else (the ratio's denominator). The Commissioner interpreted the regulations as requiring the computation of the total compensation received during the periods, including deferred compensation that was received in those periods for services rendered prior thereto. In contrast, the taxpayer contended that the apportionment computation should include only compensation received for services actually performed during such periods and not deferred compensation earned earlier but received in those periods as a result of exercising stock options and vesting of restricted stock. The Appellate Court held that the Commissioner's calculation was mandated by the plain language of the regulations and further, the methodology was consistent with the basic income tax principle that compensation is includable in gross income in the year received, and not in the year earned and therefore, affirmed the judgment of the trail court.

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