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Personal Tax Changes on the Horizon
Few changes on W-2 forms this winter when you tackle personal taxes ‹ but next year may be a different story
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Business New Haven
9/30/2002
By: Melissa Nicefaro
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When the state General Assembly convenes in January, the Blue Ribbon Commission on Property Tax Burdens and Smart Growth Incentives will set out to evaluate and recommend reductions in Connecticut s extraordinary reliance on unequal local property tax burdens.
Of the 18-member commission, six were appointed by the legislative leadership, six by Gov. John G. Rowland, four appointed by the Connecticut Conference of Municipalities (CCM), two appointed by the Connecticut Council of Small Towns (COST) and one each by the Connecticut Business & Industry Association (CBIA) and the AFL-CIO. All appointments and the first meeting of the Commission s first report are due by January 1, 2003, with a final report due by January 1, 2004. New Haven State Sen. Martin M. Looney (D-11), chairman of the legislature s Finance, Revenue & Bonding Committee, says the property tax is the most burdensome tax. A few years back, we increased the property tax credit on the income tax to a maximum of $500, he explains. When that credit was initially instituted, it was a $100 credit, but over a period of a few years, it was increased to a maximum of $500, he says. It is a progressive credit, because eligibility for the maximum credit is based on income level so, as it stands, only families earning up to a modest $100,000 a year can be eligible for the maximum credit. The eligibility for the credit phases downward from there to a minimum of $100, for which all taxpayers are eligible.
The property tax credit was unaffected by the tax changes passed in the last legislative session that dealt with budget caps.
We were able to maintain that program, says Looney. That was something that we Democrats in the General Assembly were determined to maintain because that was the most progressive tax adjustment that we had passed in a number of years.
Unless called into special session before, the General Assembly will re-convene in January.
Looney says there is a possibility of a session in November or December if there is a perception that we can act in the course of this fiscal year.
Last year Looney supported the cigarette tax that took effect in April, hiking the per-pack state tax from 50 cents to $1.11. Looney notes many neighboring states have raised their rates even higher than Connecticut, so even at $1.11, we still don t have the highest cigarette tax in the region. We re hoping that it will be something that will discourage people from smoking and give people an extra incentive to stop if they ve been trying to find reasons to quit, he says..
Another fat tax that the General Assembly accepted this past session, but that the governor vetoed, was a surcharge on incomes over $1 million. The proposal was to tax income over $1 million at 5.5 percent rather than the current 4.5 percent.
And even if we were to do that, we would still have very moderate rates by national and regional standards, Looney says. The highest marginal rate, even at 5.5 percent, would be lower than most other income taxes are at their higher end. Looney says.
Looney is pushing for new tax credit to be approved during the next legislative session. Connecticut does not have its own state-earned income tax credit, as many neighboring states do. Looney says the credit could be a benefit to the working poor, low-income families with employed wage-earners.
There is a federal earned income tax credit and for the past several years, I have proposed a state earned income tax credit that would be earned on a percentage, says Looney. Our proposal was that it would be a Connecticut credit equal to 20 percent of the federal earned income credit. New York, New Jersey and most of our neighboring states have already adopted this as a way of providing some additional benefit and tax relief to low-income working families.
New Federal Laws Target Education
Aside from state tax initiatives, there are a number of new federal tax laws taking effect this year, many including educational support.
¤ A new ten-percent tax bracket for 2002. The other tax brackets above 15 percent have been lowered by 0.5 percent each.
¤ Contributions to Education IRAs (now called Coverdell Education Savings Accounts) have increased from $500 per year per beneficiary to $2,000. The income eligibility ceilings have increased for married couples to $190,000 and phase out at $220,000. For a single taxpayer, the income eligibility ceiling remains at $95,000, while the phase-out is $110,000. Effective this year, the term qualified education expense is expanded to include certain elementary and secondary education expenses in addition to college expenses. Qualified education expenses now include payments to private and religious schools. Since the contribution limits have increased for 2002 and beyond, Coverdell Education Savings Accounts now provide a meaningful opportunity to save for education.
¤ Tuition Plans (known as 529 Plans) now offer tax-free payouts for qualified education expenses. Unlike other tax law provisions, there is no income limit to establishing a 529 Plan.
¤ A new deduction on the front page of the tax return for college tuition and fees. The deduction is limited to $3,000 this year. The income test is relatively low: $65,000 for single taxpayers and $130,000 for married couples filing jointly.
¤ The deduction for student loan interest, another front-page deduction, is no longer limited to the first 60 months of repayment. The income eligibility limits have been increased for 2002.
¤ The Job Creation and Worker Assistance Act of 2002 creates a new front-page deduction for elementary and high-school teachers who purchase their own supplies. The deduction is limited to $250 and is only in place for 2002 and 2003.
¤ Traditional and Roth IRA contribution limits have been increased from $2,000 in 2001 to $3,000 this year and even higher ($3,500) for taxpayers who turn at least 50 by year s end. If a taxpayer turns 40 by December 31, he or she is eligible to contribute the additional $500.
¤ Elective deferral limits for 401(k) and 403(b) plans are up this year to $11,000 and $12,000 if you are at least 50 by December 31. The deferral limit for SIMPLE plans is $7,000 (or $7,500 if you are 50 or older by year end).
¤ Adoption expenses may be eligible for an enhanced tax credit of income exclusion (where the employer pays) of up to $10,000 per adoption.
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