Connecticut Governor Ned Lamont has officially signed the state budget bill for fiscal years 2024 and 2025, introducing several significant changes to the tax landscape. The key provisions of the bill encompass a personal income tax cut, an extension of the corporate surcharge, revised regulations for pass-through entity tax, and the establishment of new tax credits. These modifications are aimed at stimulating economic growth and providing relief to taxpayers. Below are some of the highlights from the bill.
- Personal income tax rates: Effective January 1, 2024, the bill reduces the personal income tax rates from 5.0% to 4.5% and from 3.0% to 2.0%. The benefits of these rate cuts will be capped at $150,000 for single filers and $300,000 for joint filers.
- Corporate income tax surcharge: The bill extends the 10% corporation business tax surcharge for an additional three years, encompassing the income years 2023, 2024, and 2025.
- Revised pass-through entity tax: Starting January 1, 2024, the pass-through entity tax becomes optional rather than mandatory. Entities choosing to pay the tax must provide written notice to the Department of Revenue Services (DRS) commissioner each tax year. Additionally, the bill reinstates the requirement for entities to pay the tax on behalf of nonresident members if the business is their sole source of Connecticut income. The legislation eliminates the corporation tax credit for pass-through entity taxes paid and the option for entities to file a combined return with commonly-owned entities.
- Increased earned income tax credit: For taxable years beginning on or after January 1, 2023, the earned income tax credit is raised to 40% of the federal credit, up from the previous rate of 30.5%.
- Pension exemption expansion: Starting with the 2024 tax year, the bill extends the exemptions to individuals with federal adjusted gross income ranging from at least $75,000 to less than $100,000 for single filers, married people filing separately, and heads of household. Joint filers with income ranging from at least $100,000 to less than $150,000 will also be eligible. These deductions will phase out gradually and fully phase out at $100,000 or $150,000, depending on the filing status.
- Introduction of fixed capital investment credit: Starting on or after July 1, 2025, corporations headquartered in Connecticut that own at least 80% of an LLC treated as a partnership or disregarded entity for federal tax purposes and provide telecommunications services may earn fixed capital investment tax credits.
- Elimination of angel investor tax credit for cannabis businesses: Effective July 1, 2023, the 40% angel investor tax credit for eligible investments in approved cannabis businesses is eliminated.
- Deduction of cannabis business expenses: Starting from the taxable year commencing January 1, 2023, taxpayers holding medical marijuana or adult-use cannabis licenses can deduct ordinary and necessary business expenses for state tax purposes. These deductions are disallowed at the federal level due to marijuana’s classification as a controlled substance under the federal Controlled Substance Act.