New Tax Laws in Connecticut for 2021

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Tax planning requires staying up-to-date with new tax laws and Connecticut has some significant tax law changes for 2021. Here we go over some of these new tax laws.

Connecticut began phasing out its capital stock tax.

Connecticut is continuing to phase in an increase to its tax exemption for pension and annuity income. The exemption increased to 42% for 2021 from 28% in 2020. This means that if you pay yourself from your retirement, you can keep more of your money.

As of January 1, 2021, Connecticut now offers an income tax credit to offset real estate transfer taxes paid for certain qualifying taxpayers. Under legislation adopted in 2019 (Public Act 19-117), taxpayers who pay the state’s conveyance tax (Connecticut’s real estate transfer tax) at the new top marginal rate of 2.25 percent may be eligible for the credit if they remain in Connecticut following the sale of their property. Specifically, starting the third year after the sale, eligible taxpayers can claim a credit equal to one-third of the amount of conveyance taxes paid at the 2.25 percent rate, and this credit can be claimed for up to three years, thus potentially offsetting the full amount of conveyance taxes paid at the top marginal rate.

Connecticut is also phasing in an increase in its estate tax exemption. As of January 1, the exemption has increased from $5.1 million to $7.1 million. Next year, it is scheduled to increase to $9.1 million, and by 2023, it will match the federal exemption amount. However, as the exemption amounts are increasing, the minimum rate at which the tax is applied is also increasing. Last year, Connecticut’s estate tax rates ranged from 10 to 12 percent. This year, the rates range from 10.8 to 12 percent. By 2023, a flat rate of 12 percent will be imposed.

Connecticut is also beginning to phase out its franchise tax this year, reducing the tax rate from 3.1 mills to 2.6 mills per dollar of capital holdings. Further reductions are scheduled for 2022 and 2023, and the tax is set to be fully repealed by 2024.

As of this year, a new payroll tax is being levied in Connecticut to fund the state’s Paid Family and Medical Leave program, which was created in 2019 by Public Act 19-25. This new tax is levied at a rate of 0.5 percent, and the tax base is the portion of an employee’s wages that are subject to Social Security taxes. With its enactment, Connecticut has become the third state to impose a payroll tax for non-UI purposes, following Massachusetts, which recently adopted one for similar purposes, and before that, Nevada, which does not levy an individual income tax but does impose a capped employer-side payroll tax known as the Modified Business Tax.

These are some of the new tax laws for Connecticut. Not sure how these new tax laws may or may not affect you? Don’t hesitate to contact us with any questions. Want to stay up-to-date with new tax changes throughout the year? Sign Up for our newsletter.