Connecticut Lawmakers OK State, Local Deduction Cap Workarounds

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By Aaron Nicodemus

The Connecticut General Assembly has approved a bill that would gives taxpayers options to work around the state and local tax deduction cap contained in the new federal tax law.

In the last hours of the legislative session, the Senate and House unanimously approved S.B.11, which contains two different plans that attempt to offset the $10,000 SALT deduction cap in the 2017 federal tax act ( Pub. L. No. 115-97).

The bill would create a new “revenue-neutral” state tax on pass-through entities, which would be offset by a corresponding personal income tax credit. The amount of the new state tax would be a deductible expense on a business’s federal income tax return, according to the Department of Revenue Services.

Gov. Dannel Malloy (D), who proposed the legislation, said he will sign the bill into law.

“The disastrous Trump tax law is already hurting middle class Connecticut residents and small businesses,” he said in a May 9 statement. “It is becoming clearer every day that the Republican law is nothing more than a massive giveaway for the very wealthy while the middle class pick up the tab. The legislation passed today protects Connecticut residents from unfair tax increase brought on by the Trump administration’s reckless agenda.”

Malloy said 40 percent of Connecticut residents claim the SALT deduction, averaging $18,939.72.

Charitable Contributions

S.B. 11 would also allow Connecticut municipalities to create charitable organizations that support town services, in conjunction with a local property tax credit. Taxpayers making a contribution to the new organizations would receive a corresponding credit on their local property taxes.

Some tax professionals have questioned whether the charitable funds idea will pass muster with the IRS, which could potentially consider it an abusive tax shelter. U.S. Treasury Secretary Steven Mnuchin has cast doubt on such workarounds and has threatened to audit taxpayers who use them. IRS Publication 526 says that taxpayers can’t deduct as a charitable contribution any payment for which they receive a benefit in return.

New York and New Jersey were the first to enact such workarounds. Lawmakers in Illinois and California are considering similar plans.

Estate, Gift Tax

S.B.11 also contains several other tax-related provisions.

The bill would decouple the state from the Internal Revenue Code on federal tax changes related to accelerated depreciation and asset expensing in order “to avoid a general fund revenue loss,” Malloy said.

S.B. 11 also gradually extends the phase-in of the estate and gift tax threshold to the federal threshold. According to the bill’s fiscal note, current state law increases the estate and gift tax threshold over three years, from $2.6 million in 2018, to $3.6 million in 2019, and to the federal basic exclusion amount in 2020 and thereafter. The bill would extend the phase-in to 2023 by setting the gift and estate tax threshold at $5.1 million for 2020, $7.1 million for 2021, $9.1 million for 2022, and the federal basic exclusion amount for 2023 and thereafter, the note said.

To contact the reporter on this story: Aaron Nicodemus in Boston at anicodemus@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

For More Information

Text of S.B.11 is at http://src.bna.com/yGk.

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