The Tax Cut and Jobs Act of 2017 did not favor highly taxed states including Connecticut. Specifically, the property tax deduction taken on the personal tax return was capped at $10,000 ($5,000 if married filing separately) beginning in the 2018 tax year.
The state of Connecticut enacted a tax and a much-needed offsetting credit for pass-through entities and their owners. Pass-through entities include partnerships and s corporations. Unfortunately, the entities that do not benefit from this tax treatment include sole proprietorships, single-member LLCs, publicly traded partnerships or c corporations.
This is how it works: A 6.99% tax is applied on Connecticut sourced entity income to arrive at what is now called the ‘pass-through entity tax’. This pass-through entity tax is deducted from the entity income thus benefiting the company by reducing the taxable income at the entity level. Then, a credit is calculated in the amount of 93.01% of the pass-through entity tax and applied to reduce the individual’s tax on the personal return. The good news is that this credit can create a refund if the credit is greater than the tax on the personal return.
This new Connecticut tax and credit workaround lends itself to a myriad of planning opportunities that you and your accountant can work on to lower your tax liability.
However, this new act may face resistance from the IRS regarding the deductibility of the tax. Also, some technical details have to be ironed out before full implementation by the state. It is not all set in stone at this point, but definitely worth noting.
Disclaimer: This article is intended to provide general information and not tax advice is intended to be given.