Summary of Major State of Connecticut Tax Changes Approved by the State Legislature and Announced by Governor Rell on September 1, 2009

These State personal and corporate income tax changes are retroactively effective on January 1, 2009:

1. The marginal individual income tax rate has been increased from 5% to 6.5% for high income taxpayers: single and married filing separately with taxable income over $500,000 and married filing jointly with taxable income over $1,000,000.
2. The flat income tax rate on trusts and estates has been increased from 5% to 6.5%.
3. A 10% income tax surcharge has been placed on regular “C” corporations with over $100 million of revenues for income years beginning in 2009, 2010 and 2011.
4. The Federal domestic production activities deduction that benefits domestic manufacturers will no longer be allowed at the State level. This disallowance applies to all types of corporations as well as partnerships, LLCs and individuals.

These State estate, gift and sales tax changes are effective on January 1, 2010:

1. The threshold for State estate and gift taxes increases from $2,000,000 to $3,500,000, and the tax is then applied to the marginal amount over the threshold instead of to the entire amount as under prior law. The elimination of this tax “cliff” was a priority for tax professionals.
2. The rate on sales taxes drops from 6% to 5.5% if State tax collections do not fall by 1% or more. There are lots of “ifs” in this possible sales tax reduction, and it is quite possible that the reduction will never occur.

Federal First Time Homebuyer Credit Expires on November 30, 2009

Currently, individuals who qualify as first-time homebuyers purchasing a principal residence are entitled to a refundable Federal tax credit of the lesser of 10% of the home’s purchase price or $8,000. However, this credit is set to expire on November 30, 2009. This means that if you qualify as a first time homebuyer and you are in the process of buying or building a home, you should make every attempt to close on the home you are buying or to occupy the home you are building before the November 30th deadline. An eligible first-time homebuyer is an individual who has had no ownership interest in a principal residence in the three-year period before the home purchase. For married couples purchasing a home, both husband and wife must pass this three-year test. The homebuyer credit phases out for single individuals with adjusted gross income between $75,000 and $95,000 and for married couples with joint income from $150,000 to $170,000 for the year the home is purchased.

If you are a parent who is in the process of helping your adult child to buy a home, you and your adult child may both be able to reap tax benefits. Please contact us if you are in this situation. It is possible that Congress will extend the first time homebuyer credit beyond November 30th, 2009, but one shouldn’t count on it. If the credit is extended, we will let you know in an upcoming client alert.

Opportunity to Roll Over 2009 Required Minimum Distributions Also Expires on November 30, 2009.

Taxpayers who are age 70 and ½ or older do not have to take a required minimum distribution (RMD) from their pension plan or IRA in 2009. However, if a pension plan or IRA custodian mistakenly pays out an RMD to a taxpayer in 2009, the taxpayer must put back or “roll over” the RMD into the either the pension plan or IRA by November 30, 2009 in order to avoid taxation on the RMD. If you are in this situation and your mistaken RMD payment came from a pension plan, please call us because the pension plan may need to make certain elections to allow you to put the RMD back into the plan.

If you would like to discuss the impact of these new rules, please feel free to call us at 203-787-6527 or contact us through our website at www.bhco.com.