On October 26th, after months of political deadlock over Connecticut's spending and tax policy, the Connecticut legislature passed a bi-partisan budget bill (Senate Bill 1502) by an overwhelming margin. This is the second budget bill passed by the Connecticut legislature this year, however, the first one was vetoed by Governor Dannell Malloy in September. Governor Malloy has yet to sign the legislation and has remained noncommittal, but the legislation passed with such an overwhelming margin that the legislature would be able to override a potential veto. The budget bill is almost 900 pages long and was only made public late at night on October 25th. Attorneys in the Private Client Group of Withers Bergman LLP have been monitoring the budget process closely and are pleased to offer this summary of changes that create opportunities for our clients and partners in supporting our clients.
Estate and Gift Taxes
Connecticut remains the only state in the nation which imposes a gift tax and its estate tax exemption of $2 million is not competitive with other jurisdictions, even when compared to New York and New Jersey. To give an example, in every other state in the country, an individual could make lifetime gifts up to $5.49 million in 2017 and pay no federal or state gift taxes. However, if a Connecticut domiciliary made such a gift(s), there would be a Connecticut gift tax liability of $273,300. Under SB 1502, starting in 2020, although Connecticut will still have a gift tax, a Connecticut domiciliary would be able to use his or her full federal exemption amount without having to pay Connecticut gift taxes, which will reduce the costs of efficient wealth preservation strategies.
The key provisions of the new legislation related to estate and gift taxes are:
- Increased Exemption: Under the new legislation, Connecticut's exemption amount would increase to $2.6 million in 2018, $3.6 million in 2019, and would match the federal exemption amount beginning in 2020. While there are certain technical issues with the legislation, such as the impact of the potential repeal of the federal estate tax and the effect on non-resident aliens, there is no questioning that this is an improvement for affluent Connecticut residents.
- Tax Rate Remains Stable: Connecticut has a progressive rate estate tax, in which the rate increased based on how much is being transferred. While there were minor increases in the lower brackets and changes in how the rates are applied, the top estate and gift tax rate remains 12% and applies for amounts over $10.1 million.
- Maximum Tax Cap Lowered: Starting in 2016, Connecticut implemented a cap on the maximum amount of gift and estate taxes a taxpayer would need to pay to Connecticut. The original cap was $20 million, which translates to lifetime Connecticut gifts and transfers on death of approximately $170 million. The new legislation reduces the cap to $15 million starting in 2019, which translates to approximately $129 million based on 2019 tax rates.
- Procedural Changes: The legislation included various provisions regarding filing requirements to conform to the increased exemption amounts. Additionally, for estates required to file estate tax returns with the Department of Revenue Services (DRS), it will now be the DRS and not the probate court that will issue a release of estate tax lien on real property.
From an income tax perspective, while there were a series of tax changes that were employed as revenue raising measures, they do not directly impact many individuals' personal income tax liability. These revenue raisers include: (1) an increase in the hospital tax so as to allow greater redistribution of capital within the industry; (2) an increase of 1% (from the current 6% to 7%) in the required contribution by teachers into their pension plans starting in 2018 in order to address the currently underfunded pension system; (3) an increase to the tax levied on cigarette sales; (4) a 25 cent fee on each ride originating in Connecticut for ridesharing services, such as Uber and Lyft; (5) a direction for the legislature to reduce certain yet to be identified tax credits.
Perhaps just as important as what was in the bill, is what was left out. Items that were proposed throughout the prolonged budget battle that did not find their way into Senate Bill 1502 include:
- Personal Income Tax Rates: There was no increase to personal income tax rates, with the top rate remaining at 6.99%.
- Carried Interest: Earlier this year, two bills were proposed that would have levied higher income taxes on managers in CT's fund industry. House Bill 6973 and House Bill 7313 were each introduced earlier in 2017 to create the framework for imposing a 19% tax on “investment management service fees” (also known as “carried interest”) so as to effectively tax the fees as ordinary income. Governor Malloy had consistently expressed concern about these proposals and had suggested that he would defer to the US Treasury Department and federal government on any action associated with special taxes on the investment management industry.
- Sales Taxes: Additionally, the bill did not contain cell phone or sales tax increases, which each had been topics of recent discussion and negotiation.