State of Connecticut 2011 Income Tax Increase

The State of Connecticut recently increased the state income tax rates.  Oh, and they made them retroactive to the beginning of 2011.  Don't you Connecticut income taxpayers just love this?

The number of income tax brackets was increased from three to six.  The new income tax rates are 3%, 5%, 5.5%, 6%, 6.5% and 6.7%.  Additionally, the property tax credit was reduced from $500 to $300.

The starting point to calculate Connecticut income tax is your federal adjusted gross income ("AGI"). This is on Line 37 from the 2010 Federal Tax Form 1040.  Connecticut makes certain adjustments to this to arrive at Connecticut taxable income.  Some of the more common adjustments are for interest on U.S. obligations, interest on out of state municipal bonds and prior year state income tax refund received.  

Connecticut Income Tax Reduction Strategies
To reduce AGI and therefore the State of Connecticut income tax, taxpayers should consider maximizing their contributions to their 401(k) plan, if they are participating in one.  If their employer does not offer a 401(k) plan, taxpayers should fund their IRA account.  Small business owners in Connecticut should consider adopting a SIMPLE Retirement Plan or a Simplified Employee Pension ("SEP").  Another way to reduce AGI is to recognize capital losses.  These are limited to a net loss of $3,000 per year.  Any excess capital losses are carried over into future years.  Finally, Connecticut allows for a state income tax deduction for contributions to their 529 College Savings Plan, also known as CHET.  This deduction is limited to annual contributions up to $5,000 for a single taxpayer and $10,000 for a married couple filing jointly.

Connecticut taxpayers should adjust their Connecticut income tax withholding and/or their estimated income taxes as follows:

• Adjust Connecticut Income Tax Withholding—All taxpayers should review their withholding.  Any adjustments to have additional income tax withheld would be done on Form CT-W4.  Employees should contact their human resource department to get this form completed and updated.
• Adjust Estimated Income Taxes—The next quarterly estimated income taxes are due on September 15, 2011.  Connecticut estimated income taxes are filed with Form CT-1040ES. Taxpayers that must file Connecticut estimated income taxes need to review their projected 2011 tax liability.  Failure to make this adjustment with this estimated tax payment will result in an underpayment penalty being assessed when the 2011 return is filed.  As with all other communication with the tax authorities, we recommend that estimated tax payments are sent Certified Mail Return Receipt Requested. 

ACTION ITEM:  Connecticut taxpayers need to project their estimated 2011 state income tax liability.  Adjustments will need to be made to their withholding or estimated income taxes.

Thomas F. Scanlon, CPA, CFP®