State and Local Tax Update February 2018
Below, please find a summary of recent Connecticut, New Jersey, New York and Pennsylvania law changes that include some new provisions, an extension of some old ones and reactions, if any, to the most recent federal tax law changes.
1. State of Connecticut Update
Personal Income Tax
- The 100% tax exemption for Social Security benefits for single filers and married people filing separately with federal adjusted gross incomes (AGI) of less than $75,000 (currently $50,000) and joint filers and heads of household with federal AGIs of less than $100,000 (currently $60,000) has been delayed to taxable years beginning January 1, 2019 rather than January 1, 2018 as previously provided by the budget bill.
- From the 2019 through 2025 tax years, the bill phases out the income tax on pension and annuity income for taxpayers with federal AGIs below certain thresholds. In January 1, 2025, all pension or annuity income is deductible.
- A personal income tax deduction is provided for the amount of lost wages and medical, travel and housing expenses, not to exceed $10,000 in the aggregate, incurred by a taxpayer during the taxable year in connection with the donation to another person of an organ for organ transplantation occurring on or after January 1, 2017. For purposes of the deduction, “organ” means human bone marrow or all or part of a human liver, pancreas, kidney, intestine or lung.
- The teacher’s pension deduction is modified so that for taxable years beginning January 1, 2016, January 1, 2017, and January 1, 2018, the deduction is equal to 25% of the income received from the state teachers’ retirement system and for taxable years beginning January 1, 2019 and thereafter, the deduction is equal to 50% of the income received from the state teachers’ retirement system.
- For the taxable years commencing January 1, 2017, and January 1, 2018, the property tax credit will only be allowed for a resident who is 65 or older before the close of the applicable taxable year, or who files a return under the federal income tax for the applicable taxable year validly claiming one or more dependents.
- Effective January 1, 2019, the law establishes a refundable personal income tax credit of $500 for college graduates who are employed in the state; receive, on or after January 1, 2019, a bachelor’s, master’s, or doctoral degree in a science, technology, engineering, or math (STEM) field and live in Connecticut or move to the state within two years after graduating. The credit may be claimed in each of the five successive taxable years after the date of graduation.
Corporation Business Tax
- For income years beginning on or after December 1, 2017, the green building tax credit is eliminated.
- The annual aggregate neighborhood assistance act tax credit cap is lowered from $10 million to $5 million.
- A program will be established to allow businesses in the state to utilize accumulated or “stranded” research and development expenditures tax credits under against the corporation business tax or sales and use tax in exchange for capital projects, planned or underway, in the state that propose to: (1) expand the scale or scope of such business; (2) increase employment at such business; or (3) generate a substantial return to the state economy. In addition, the Commissioner may hold an innovation investment fund tax credit auction to allow taxpayers with accumulated research and development expenditures tax credits or research and experimental expenditures credits under to utilize such credits in exchange for making venture capital investments.
- Applicable to taxable and income years beginning on or after January 1, 2017, a 7/7 Brownfield Revitalization program is established to provide state and local tax incentives to eligible owners for up to 14 years after remediating, redeveloping, and using formerly contaminated, abandoned, or underutilized property. The program is administered by the Commissioner of Economic and Community Development. Available incentives include corporation business and personal income tax credits, sales and use tax exemptions, and a property tax assessment freeze during first seven years after an approved property’s redevelopment and corporation business or personal income tax deductions for eligible remediation expenses in years eight through 14 after the approved property was contaminated and remediated.
- The bill also restores and makes permanent the moratorium on issuing film and digital media production tax credits to certain motion pictures that had expired on July 1. The moratorium does not apply to motion pictures that conduct at least 25% of their principal photography days in a Connecticut facility that receives at least $25 million in private investment and opens for business on or after July 1, 2013. Beginning January 1, 2018, the bill allows the credit to be claimed against the tax on gross earnings of community antenna television systems, one-way satellite transmission businesses and certified competitive video service providers in addition to the insurance premium and corporation business taxes. For the income year commencing January 1, 2018, any film credit that is sold, assigned or otherwise transferred, in whole or in part, to one or more taxpayers may be claimed against the tax on gross earnings of community antenna television systems, one-way satellite transmission businesses and certified competitive video service providers only if there is common ownership of at least 50% between the taxpayer and the eligible production company that sold, assigned or otherwise transferred the credit. The taxpayer may only claim 92% of the amount of the credit entered by DRS on the production tax credit voucher. For income years commencing on or after January 1, 2019, any credit that is sold, assigned or otherwise transferred, in whole or in part, to one or more taxpayers, which is claimed against the tax on gross earnings of community antenna television systems, one-way satellite transmission businesses and certified competitive video service providers is subject to the following limits: (1) the taxpayer may only claim 95% of the amount of the credit entered by the DRS on the production tax credit voucher; and (2) if there is common ownership of at least 50% between the taxpayer and the eligible production company that sold, assigned or otherwise transferred the credit, the taxpayer may only claim 92% of the amount of the credit entered on the production tax credit voucher.
Sales and Use Tax
- The bill expands the number of affiliated businesses that qualify for the sales and use tax exemption on sales of services between affiliates. Effective July 1, 2019, the ownership threshold, is lowered from 100% to at least an 80% controlling interest for media businesses organized as corporations or single member limited liability companies or sole proprietorships and are principally located in the state.
- Effective January 1, 2018, the legislation eliminates the 3% rental surcharge on each passenger motor vehicle or rental truck rented within the state by a rental company to a lessee for a period of less than 31 days and authorizes rental companies to charge lessees individually itemized charges or fees as part of a rental agreement, including, but not limited to, a vehicle cost recovery fee, airport access fee or airport concession fee. Any such charge or fee is in addition to any tax otherwise applicable to any such transaction and will be includable in the measure of the sales and use taxes imposed.
- Effective July 1, 2019 and applicable to income and taxable years commencing on or after July 1, 2019, the bill imposes a 10.5% gross receipts tax on fantasy sports contests. “Gross receipts” means the total of all entry fees collected by an operator from all players, less the total amount paid out as prizes to players, multiplied by the location percentage. “Location percentage” means the percentage rounded to the nearest tenth of a percent of the total entry fees collected from players located in Connecticut, divided by the total of entry fees collected from all players in fantasy contests.
Estate and Gift Tax
- Beginning January 1, 2018, the bill increases the estate and gift tax threshold over three years. With respect to the estates of decedents dying or gifts made on or after January 1, 2018, but prior to January 1, 2019, no tax will be imposed on taxable estates or gifts not over $2.6 million. With respect to the estates of decedents dying or gifts made on or after January 1, 2019, but prior to January 1, 2020, no tax is imposed on taxable estates or gifts not over $3.6 million. With respect to the estates of decedents dying or gifts made on or after January 1, 2020, no tax is imposed on taxable estates or gifts not over the federal basic exclusion amount. For estate tax, “Federal basic exclusion amount” means the dollar amount published annually by the Internal Revenue Service (IRS) at which a decedent would be required to file a federal estate tax return based on the value of the decedent’s gross estate and federally taxable gifts. For gift tax, “federal basic exclusion amount” means the dollar amount published annually by the IRS over which a donor would owe federal gift tax based on the value of the donor’s lifetime federally taxable gifts.
- Starting January 1, 2019, the cap on the maximum estate and gift tax imposed is lowered from $20 million to $15 million.
- For decedents who die beginning January 1, 2018, but prior to January 1, 2019, if the decedent’s Connecticut taxable estate is over $2.6 million, the tax return must be filed with the Commissioner and a copy of the return must be filed with the probate court. If the decedent’s Connecticut taxable estate is $2.6 million or less, the return must be filed with the probate court. For decedents who die beginning January 1, 2019, but prior to January 1, 2020, this amount is increased to over $3.6 million. If the decedent’s Connecticut taxable estate is $3.6 million or less, the return is filed with the probate court. For decedents who die on or after January 1, 2020, the amount has to be greater than the federal basic exclusion amount to be filed with the Commissioner and the probate court. If less, the return is filed with just the probate court.
Reaction to Federal Law Changes
Governor Malloy’s plan proposes the following:
- A new revenue-neutral tax on pass-through entities, fully offset by a personal income tax credit, will prevent Connecticut’s small business owners from being targeted by the federal tax law.
- Allowing municipalities to create charitable organizations that support town services, in conjunction with a local property tax credit, will allow our cities and towns to continue to provide services while reducing individuals’ federal taxes.
- To avoid a General Fund revenue loss, Connecticut will not adopt federal tax changes related to accelerated depreciation and asset expensing.
2. State of New Jersey Update
Personal Income Tax
- The retirement income exclusion is available to taxpayers with $100,000 or less in gross income for the entire year and who are 62 or older or blind or disabled. For 2017, the exclusion is $30,000 for single taxpayers, $40,000 for married filing jointly taxpayers and $20,000 for married filing separately taxpayers. For 2018, the exclusion is scheduled to increase to $45,000 for single taxpayers, $60,000 for married filing jointly taxpayers and $30,000 for married filing separately taxpayers. The exclusion will increase in 2019 and 2020 until it reaches $75,000 for single taxpayers, $100,000 for married filing jointly taxpayers and $50,000 for married filing separately taxpayers.
- Exemption for veterans: Beginning in 2017, veterans who were honorably discharged or released under honorable circumstances from active duty in the Armed Forces of the United States will be eligible for an additional $3,000 exemption.
Corporation Business Tax
- Two new tax credits have been added to the tax return. These credits are the business employment incentive program credit (Form 324); and the public infrastructure credit (Form 325).
Angel Investor Credit:
- The Angel Investor Tax Credit has been revised to allow a credit for a qualified investment in a New Jersey emerging technology business holding company as long as 100% of the investment is transferred from the holding company to the New Jersey emerging technology business. This credit is being applied retroactively to qualified investments made for tax years beginning on or after January 1, 2012.
Sales and Use Tax
- The New Jersey Sales and Use Tax is being reduced in two phases between 2017 and 2018. On January 1, 2017, the tax rate decreased from 7% to 6.875%. On January 1, 2018, and after, the tax rate is scheduled to decrease to 6.625%.
- Beginning May 1, 2017, receipts from transportation services provided by a limousine operator became exempt from sales and use tax.
- Beginning with tax year 2017, any notice of annual assessment or change in assessment issued to a property owner must contain the deadline to file an appeal in boldface type.
- The annual deduction for veterans and property tax exemption for disabled veterans has been extended to members of the U.S. Armed Forces assigned to the rescue and recovery mission at the World Trade Center.
Reaction to Federal Law Changes
- On February 26, 2018 the New Jersey State Assembly passed a bill whereby local governments would be permitted to set up charitable funds for specific public purposes. Resident taxpayers could then pay into this fund and receive up to a 90% credit toward their property tax bill. Furthermore, the amount would also be taken into account as a charitable contribution for federal income tax purposes. It is expected that the New Jersey State Assembly will pass this bill and the new Governor has stated that he would sign it. As with a similar proposal in New York State, the Internal Revenue Service has questioned this arrangement notwithstanding the fact that similar arrangements have been available in 33 other states.
3. State of New York Update
Reaction to Federal Law Changes
Governor Cuomo’s 30 day amendment to the NYS Budget includes the following proposals:
- Employers would be able to opt-in to a new ECET system. Employers that opt-in would be subject to a five percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on January 1, 2019. The progressive personal income tax system would remain in place, and a new tax credit corresponding in value to the ECET would cut the personal income tax on wages and ensure that State filers subject to the ECET would not experience a decline in take-home pay. Overall, the proposal is designed to be revenue neutral for the state while giving employers the opportunity to reduce their employees’ federal taxes.
- Under the legislation, the deadline for the first annual election for employers to opt-in to this alternative system will be on October 1, 2018, for the 2019 tax year. The benefits associated with the election will include not only income tax relief for affected employees but also a new tax credit available to employers to offset administrative costs. For those who opt-in, the new payroll tax on wages over $40,000 would be phased in over three years: 1.5 percent in first year, 3 percent in second year, 5 percent in third year.
- The legislation creates two new state-operated Charitable Contribution Funds to accept donations for the purposes of improving health care and education in New York. Taxpayers who itemize deductions could claim these charitable contributions as deductions on their Federal and State tax returns. Any taxpayer making a donation could also claim a State tax credit equal to 85 percent of the donation amount for the tax year after the donation is made. In addition, the amendment authorizes school districts and other local governments to create charitable funds for education and health care. Donations to these funds would provide a reduction in local property tax bills (via a local credit) equal to a percentage of the donation.
- The legislation decouples the state tax code from the federal tax code, where necessary.
- The 30-day amendments will also maintain the State standard deduction for single filers. Without this change, single filers would not be able to take the standard deduction on their State return.
4. State of Pennsylvania Update
Corporation Business Tax
- The Pennsylvania Department of Revenue recently issued Corporation Tax Bulletin 2017-02 in which it announced it will disallow the deduction of federal 100% bonus depreciation for Corporate Net Income Tax purposes for an asset placed in service after September 27, 2017, until the year the asset is sold or otherwise disposed.
- Last month, the Pennsylvania Supreme Court denied the taxpayer’s petition for re-argument in Nextel Communications, relating to the constitutionality of Pennsylvania’s 2007 Corporate Net Income Tax NOL deduction limitation.
Sales and Use Tax
- Marketplace facilitators, referrers and remote sellers have until March 1, 2018, to elect for this year to either comply with Pennsylvania’s new consumer use tax notification and reporting regime or to voluntarily collect and remit Pennsylvania sales-and-use tax. A $20,000 penalty may apply for a consumer use tax reporting violation.
Should you require any additional information on the Connecticut, New Jersey, New York and Pennsylvania Tax Update, please feel free to contact Steven J. Eller