Location:
TAXES - INCOME;
Scope:
Program Description;

OLR Research Report


September 2, 2010

2010-R-0372

BACKGROUNDER: A GUIDE TO THE STATE PERSONAL INCOME TAX

By: Rute A. Pinho, Associate Legislative Analyst

This report provides an overview of Connecticut's personal income tax, including the tax rates, exemptions, and credit amounts and thresholds in effect for the 2009 tax year. It presents scenarios to illustrate how the tax features work. And it compares the major features of income taxes in selected states.

OVERVIEW OF THE INCOME TAX STRUCTURE

The Connecticut income tax applies to full-time residents who meet specific income thresholds or conditions and part-time residents and non-residents with income derived from sources within the state. The starting point for calculating the tax is the amount of federal Adjusted Gross Income (AGI) on a taxpayer's federal tax return. Taxpayers make several additions or subtractions to federal AGI to determine the portion of their income subject to Connecticut's income tax. For some filers, this amount is further reduced by a personal exemption. Taxpayers then apply tax rates that depend on the amount of taxable income and vary by filing status. The amount of tax a person actually pays may be further offset by credits, including personal and property tax credits that gradually phase out at higher income levels.

WHO MUST FILE?

Connecticut's income tax applies to full-time Connecticut residents who have earned or unearned income and part-time residents and non-residents with Connecticut-source income. Taxpayers must file an income tax return if they:

● have Connecticut income tax withheld from their wages,

● make estimated Connecticut income tax payments,

● meet the gross income test (i.e., filing threshold), or

● have a federal alternative minimum tax liability.

In 2009, the gross income test was:

● $12,000 for married people filing separately,

● $13,000 for single filers,

● $19,000 for heads of household, and

● $24,000 for married couples filing jointly or surviving spouses.

HOW IS THE TAX CALCULATED?

Taxable Income

The starting point for calculating Connecticut income tax is the amount of federal AGI on a taxpayer's federal tax return. As Figure 1 shows, the taxpayer applies certain modifications to federal AGI to arrive at Connecticut AGI (CT AGI). CT AGI is used to compute Connecticut taxable income, or income subject to the state income tax. For some filers, this amount is further reduced by a personal exemption.

Figure 1: Connecticut Taxable Income


Modifications to a taxpayer's federal AGI can include additions and subtractions, such as the loss or gain on the sale of Connecticut state or local bonds and a deduction for contributions to the college savings plan called the Connecticut Higher Education Trust. A taxpayer can also deduct (1) 75% or 100% of his or her federally taxable Social Security benefits, depending on federal AGI and filing status; (2) 100% of railroad retirement benefits; and (3) 50% of federally taxable military retirement benefits.

While individuals with incomes below specified thresholds are exempt from filing, others are eligible to have their taxable income reduced through personal exemptions. The exemption amounts gradually phase out at higher income levels until they are completely eliminated. Table 1 shows the maximum personal exemption by filing status, the threshold for receiving the maximum exemption, and the AGI level above which the exemption is no longer available.

Table 1: Personal Exemptions

Category of Filer

Maximum Personal Exemption

Threshold for Maximum Exemption (AGI)

No Exemption (AGI)

Single

$13,000

$26,000

> $38,000

Married Filing Separately

$12,000

$24,000

> $35,000

Head of Household

$19,000

$38,000

> $56,000

Married Filing Jointly

$24,000

$48,000

> $71,000

Source: DRS' 2009 Connecticut Resident Income Tax Instruction Booklet

Tax Rate

The income tax has three income brackets and three tax rates, depending on the amount of taxable income. The rates increase for taxable income that exceeds specified income thresholds, which vary by filing status. For example, a single filer with a taxable income of $1 million pays 3% on the first $10,000, 5% on the income between $10,000 and $500,000, and 6.5% on the last $500,000 of income. Table 2 shows the brackets and rates by filing status.

Table 2: Tax Rates and Brackets

Category of Filer

Connecticut Taxable Income

Tax Rate

Single or Married Filing Separately

Up to $10,000

3.0%

$10,000 < taxable income > $500,000

5.0%

Over $500,000

6.5%

Head of Household

Up to $16,000

3.0%

$16,000 < taxable income > $800,000

5.0%

Over $800,000

6.5%

Married Filing Jointly

Up to $20,000

3.0%

$20,000 < taxable income > $1,000,000

5.0%

Over $1,000,000

6.5%

Source: DRS' 2009 Connecticut Resident Income Tax Instruction Booklet

Credits

The amount of tax a filer actually pays may also be offset by a personal tax credit, property tax credit, and credit for income taxes paid to other jurisdictions. The personal and the property tax credit gradually phase out at higher income levels.

Personal Tax Credit. A personal tax credit ranging from 1% to 75% of the tax due is available to all categories of filers up to certain income levels. Like the personal exemption, the personal tax credit phases out at higher income levels until it is completely eliminated. Table 3 shows the CT AGI levels that qualify for the maximum 75% credit and the levels at which the credit phases out. Taxpayers are not charged the full tax rates until their incomes exceed the “no credit” amount.

Table 3: Personal Tax Credits

Category of Filer

Qualifies for the Maximum 75% Credit

No Credit

Single

$13,000 < AGI > $16,300

AGI > $56,500

Married Filing Separately

$12,000 < AGI > $15,000

AGI > $52,500

Head of Household

$19,000 < AGI > $24,000

AGI > $78,500

Married Filing Jointly

$24,000 < AGI > $30,000

AGI > $100,500

Source: DRS' 2009 Connecticut Resident Income Tax Instruction Booklet

Property Tax Credit. Taxpayers may qualify for a credit for property taxes paid on a primary residence and automobile in Connecticut. The amount of the property tax credit depends on the amount of property tax paid and the filer's CT AGI. The percent of property tax paid that can be taken as a credit declines as income increases until it completely phases out. The maximum credit allowed, regardless of filing status, is $500 per return.

Table 4 shows for each filing status the (1) threshold for receiving the maximum property tax credit and (2) level above which the credit is no longer available.

Table 4: Property Tax Credit

Category of Filer

Maximum Credit Threshold (AGI)

No Credit

Single

$56,500

AGI > $146,500

Married Filing Separately

$50,250

AGI > $92,250

Head of Household

$78,500

AGI > $168,500

Married Filing Jointly

$100,500

AGI > $190,500

Source: DRS' 2009 Connecticut Resident Income Tax Instruction Booklet

Other Income Tax Payments. Taxpayers can also subtract from their Connecticut income tax liability income tax paid to other states or local governments in other states, such as New York City.

Tax Calculation Examples

The following scenarios and accompanying tables show how the various tax features work.

Scenario 1. Sam is a Connecticut resident, files as single and has $27,000 in federal AGI. He paid $315 in property tax on his car in 2009.

Sam's CT AGI qualifies him for a $12,000 personal exemption and a 15% personal tax credit. His income tax liability is further reduced by a property tax credit equal to the total $315 he paid in property taxes.

Table 5: Single Filer with Federal AGI of $27,000

 

Factor

Amount

Calculation

1

Federal AGI

$27,000

 

2

Modifications to federal AGI

$0

 

3

CT AGI

$27,000

Add lines 1 and 2

4

Personal exemption

$12,000

 

5

Connecticut taxable income

$15,000

Subtract line 4 from line 3

6

Connecticut income tax

$550

Multiply amount on line 5 up to $10,000 by 3% ($10,000 x 0.03 = $300)

Multiply amount on line 5 above $10,000 by 5% ($5,000 x 0.05 = 250)

Add both amounts ($300 + $250 = $550)

7

Personal tax credit

0.15

 

8

Personal credit amount

$82.50

Multiply amount on line 6 by amount on line 7

9

Income tax

$468

Subtract line 8 from line 6

10

Property tax credit

$315

 

11

Tax due

$153

Subtract line 10 from line 9

Scenario 2. Jack is a Connecticut resident who files as head of household. In 2009, he had a federal AGI of $142,000 and paid $6,500 in property taxes. He also made $2,000 in contributions to his son's CHET account.

Jack can subtract from his federal AGI the $2,000 he contributed to his son's CHET account, but his income makes him ineligible for the personal exemption and the personal tax credit. While he is still able to offset his tax liability with a property tax credit, his income level reduces his property tax credit to $150 of the maximum $500 credit.

Table 6: Head of Household Filer with Federal AGI of $142,000

 

Factor

Amount

Calculation

1

Federal AGI

$142,000

 

2

Modifications to federal AGI

($2,000)

Deduction for CHET contributions

3

CT AGI

$140,000

Add lines 1 and 2

4

Personal exemption

$0

 

5

Connecticut taxable income

$140,000

Subtract line 4 from line 3

6

Connecticut income tax

$6,680

Multiply amount on line 5 up to $16,000 by 3% ($16,000 x 0.03 = $480)

Multiply amount on line 5 above $16,000 by 5% ($124,000 x 0.05 = 6,200)

Add both amounts ($480 + $6,200 = $6,680)

7

Personal tax credit

$0

 

8

Personal credit amount

$0

Multiply amount on line 6 by amount on line 7

9

Income tax

$6,680

Subtract line 8 from line 6

10

Property tax credit

$150

Multiply maximum property tax credit allowed by the decimal amount for filing status and CT AGI ($500 x 0.70 = $350);

Subtract from $500 ($500 - $350 = $150)

11

Tax due

$6,530

Subtract line 10 from line 9

Scenario 3. Tom and Kat are Connecticut residents and file as married filing jointly. They have a federal AGI of $170,000. Tom works in Connecticut and earned $62,000 in wages. Kat earned $25,000 in wages working in New York and $80,000 working in Connecticut. Kat filed a New York nonresident income tax return and paid $1,560 in taxes. They paid $7,300 in property taxes on their house and cars.

Tom and Kat do not quality for a personal exemption or a personal tax credit, but they can receive a credit for the income tax they paid to New York. (The amount of the credit is based on their Connecticut income tax liability and the proportion of income attributable to New York included in their CT AGI.) They can also claim a property tax credit of $150.

Table 7: Joint Filers with Federal AGI of $170,000 and Income Tax Paid to Another State

 

Factor

Amount

Calculation

1

Federal AGI

$170,000

 

2

Modifications to federal AGI

$0

 

3

CT AGI

$170,000

Add lines 1 and 2

4

Personal exemption

$0

 

5

Connecticut taxable income

$170,000

Subtract line 4 from line 3

6

Connecticut income tax

$8,100

Multiply amount on line 5 up to $20,000 by 3% ($20,000 x 0.03 = $600)

Multiply amount on line 5 above $20,000 by 5% ($150,000 x 0.05 = $7,500)

Add both amounts ($600 + $7,500 = $8,100)

7

Personal tax credit

$0

 

8

Personal credit amount

$0

Multiply amount on line 6 by amount on line 7

9

Income tax

$8,100

Subtract line 8 from line 6

10

Credit for income tax paid to other jurisdictions

$1,169

Calculated using Schedule 2, Form CT-1040

11

Property tax credit

$150

Multiply maximum property tax credit allowed by the decimal amount for filing status and CT AGI ($500 x 0.70 = $350);

Subtract from $500 ($500 - $350 = $150)

12

Tax due

$6,781

Subtract lines 10 and 11 from line 9

COMPARING INCOME TAXES IN SELECTED STATES

Table 9 compares the major features of the income tax in Connecticut, Maryland, Massachusetts, New Jersey, New York, and Rhode Island. It includes the filing thresholds, personal exemptions, range of rates, number of tax brackets, and income levels at which the top marginal tax rates begin. The information listed is for the 2009 tax year.

Table 8: Comparison of Income Taxes in Connecticut and Selected States in 2009

Factor

Connecticut

Maryland

Massachusetts

New Jersey

New York

Rhode Island*

Filing Threshold

Single: $13,000

Married-J: $24,000

Married-S: $12,000

Head of household: $19,000

Single: $9,350

Married-J: $18,700

Married-S: $3,650

Head of household: $12,000

Full- or part-time residents – gross income over $8,000

Non-residents –

Single: $4,400

Married-J: $8,800

Married-S: $4,400

Head of household: $6,800

Single: $10,000

Married-J: $20,000

Married-S: $10,000

Head of household: $20,000

Resident – required to file a federal return

Non- or part-time resident --

Single: $7,500

Married-J: $15,000

Married-S: $7,500

Head-of-household: $10,500

Resident – required to file a federal return

Non- or part-time resident – (1) required to file a federal return and has RI source income or (2) has RI modifications that increase federal AGI

Personal Exemption

Single: $13,000

Married-J: $24,000

Married-S: $12,000

Head of household: $19,000

(phased out at higher incomes)

$3,200 for each exemption allowed in determining federal taxable income

Dependents age 65 and over: add $3,200

Age 65 or over: add $1.000

Blind: add $1,000

Single: $4,400

Married-J: $8,800

Married-S: $4,400

Head of household: $6,800

Dependents: add $1,000

Age 65 or over: add $700

Blind: add $2,200

Single: $1,000

Married-J: $2,000

Married-S: $1,000

Head of household: $1,000

Age 65 or over: add $1,000

Dependent: add $1,500

Dependent in college: add $1,000

Blind of Disabled: add $1,000

No personal exemptions for filer or spouse

Dependent: $1,000

$3,650 for each exemption allowed in determining federal taxable income

(reduced at higher incomes)

Rate Range

3% – 6.5%

2% – 6.25%

5.3% flat

(capital gains 12%)

1.4% – 10.75

4% – 8.97%

3.75% – 9.90%

Number of Brackets

3

8

1

8 for single and married filing separately

9 for married filing jointly and heads of households

7

5

Top Marginal Tax Rate Begins at:

Single: $500,001

Married-J: $1,000,001

Married-S: $500,001

Head of household: $800,001

$1,000,001

N/A

$1,000,000

$500,001

Single: $372,951

Married-J: $372,951

Married-S: $186,476

Head of household: $372,951

* In June 2010, the Rhode Island General Assembly passed a tax bill that significantly changes the state's income tax structure. Among other things, the new law reduces the number of tax brackets from five to three, with rates ranging from 3.75% to 5.99%. The changes are effective January 1, 2011.

Sources: CCH State Tax Guide; Instructions for the NJ-1040; Maryland 2009 State & Local Tax Forms & Instructions; 2009 Massachusetts Resident Income Tax Form 1 Instructions; RI-1040 Rhode Island Resident Individual Income Tax Return; Combined Instructions for Forms IT-150 and IT-201: New York Full-Year Resident Income Tax Returns

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