■ Connecticut Estate Tax Made Less Harsh: ◙ For deaths and gifts on or after January 1, 2010, the Connecticut exclusion is increased from $2 million to $3.5 million. This is consistent with current federal law. ◙Under old law, an estate or gift valued at $2 million or less was not taxed. However, the full value of any estate or gift valued more than $2 million is taxable. This paradigm resulted in a “cliff” in which a $1 increase in the value of a gift or estate from $2,000,000 to $2,000,001 increases tax liability from zero to over $100,000. ◙ Not all changes were favorable. The new law increased the flat income tax rate for trusts and estates from 5% to 6.5% from 2009 on. ◙ Filing deadlines were also accelerated. An executor (personal representative) will have to file an estate tax return six (rather than 9 under old law) months after the date of death, starting with deaths on or after July 1, 2009.
■ Connecticut Business Tax: Changes will ensnare more businesses in the Connecticut tax system. Under prior law a business needed a "physical presence" in Connecticut to pay tax. The new law is much broader and will subject a business (and/or the equity owners) to Connecticut tax if the business had a “substantial economic presence” in Connecticut, or if it derived income from sources within Connecticut. If your business purposefully directs business into Connecticut it will have a tax nexus. A business’ purpose would be evaluated by the frequency, quantity, and systematic nature of its economic contact within Connecticut.
■ Personal Injury Settlement: Generally not included in gross income, other than punitive damages. IRC Sec. 104(a)(2). This result will be available whether or not the amounts are received by suit or settlement agreement, and whether or not received in a lump sum or as periodic payments by individuals on account of personal physical injuries (including death) or physical sickness. This exclusion had required that excluded damages must derive from a tort claim. This requirement was relaxed in Prop. Reg. 127270-06 9/14/09). The proposed regulations expressly delete the requirement that to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon "tort or tort type rights."
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