You asked (1) how many Connecticut taxpayers benefited from the individual income tax reductions enacted in P. L. 108-27, the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and (2) what income brackets were affected.

SUMMARY

We cannot answer your questions precisely because federal income tax data for Connecticut is limited and does not allow us to match the JGTRRA changes with specific data for Connecticut for 2003, the year the changes took effect. Consequently, this report provides only indications, rather than exact figures, concerning the number and income levels of Connecticut taxpayers affected by each change.

JGTRRA made several changes in federal income taxes for individuals. The changes include reductions of approximately two percentage points in tax rates for each of the four highest federal tax brackets, expansion of the lowest (10%) bracket to cover more income, reductions in tax rates on capital gains and dividends, an increase in the child tax credit, changes in income brackets and standard deductions for married joint filers to provide relief from the so-called “marriage penalty,” and increases in the amount of exempt income used to calculate whether a taxpayer is subject to the alternative minimum tax (AMT).

Based on Internal Revenue Service (IRS) data for the 2002 tax year (the most recent complete data available), about 25% of Connecticut taxpayers reported capital gains income and almost 35% reported dividend income. In addition, just over 18% took advantage of the child tax credit in 2002, while 39% of federal returns for Connecticut were joint returns. These statistics provide some indication of the percentage of Connecticut taxpayers who could have benefited from the JGTRRA.

No statistics are available to judge the Connecticut effects of the JGTRRA’s tax bracket changes. Income distribution simulations from the Tax Policy Center (jointly run by the Urban Institute and the Brookings Institution), show that average taxpayers at all income levels saw a tax reduction from the JGTRRA in 2003. Average reductions varied from about $ 1 at the lowest income levels to over $ 93,000 for taxpayers with adjusted gross incomes (AGI) of $ 1 million or more.

In the center’s simulations, those with AGIs of under $ 20,000 (about 30% of Connecticut taxpayers in 2002) saw average reductions of from $ 1 to $ 53 for 2003; those with AGIs of $ 30,000 to $ 50,000 (18. 3% of 2002 Connecticut taxpayers) received average reductions of between $ 323 and $ 451 for 2003; and those with AGIs of $ 1 million or more received average reductions of $ 93,530 for 2003. About 0. 36% of Connecticut taxpayers fell into the latter category in 2002, according to the IRS.

In addition to the Tax Policy Center’s AGI-ranked simulations, we also include with this report several simulations of the effect of the JGTRRA on hypothetical taxpayers with different household and family characteristics, filing status, and incomes. These simulations, which show that the 2003 tax reduction law has widely varying effects in individual cases, were published by the Wall Street Journal; the U. S. Treasury Department; and Commerce Clearinghouse, a tax and legal reporting and analysis service.

DATA LIMITATIONS

In trying to provide information in answer to your request, it is important to highlight the significant shortcomings in the data available for this report. Although Connecticut-specific figures on federal tax filings are available from the IRS, several problems arise in trying to match that data with the JGTRRA’s specific tax changes.

First, while all the JGTRRA income tax reductions took effect either at the beginning of, or part of the way through, the 2003 tax year, the most recent complete Connecticut federal tax data available from the IRS covers the 2002 tax year. Second, although the IRS provides the numbers of Connecticut filers of various types and income levels who reported various types of income and took various credits on their federal 1040 forms, the data is compiled by adjusted gross income. Most of the JGTRRA tax reductions apply to particular levels of taxable income. Adjusted gross income (AGI) includes all types reportable income, while taxable income is the amount remaining after all permissible deductions and credits have been applied. Because of these and other data issues, it is not possible to match up JGTRRA’s tax reductions with Connecticut-specific IRS data to estimate the number of affected taxpayers.

INDIVIDUAL INCOME TAX CHANGES IN JGTRRA

Reductions in Marginal Tax Rates

The JGTRRA accelerated reduced tax rates on the four highest of the six federal income tax brackets. These reductions were previously scheduled to take effect January 1, 2006. Instead, the law made the new rates effective January 1, 2003. The new rates (shown in Table 1) remain in effect through 2010.

Table 1: 2003 Federal Income Tax Rates Under JGTRRA

The lower marginal rates benefit single taxpayers with 2003 taxable incomes over $ 28,402 ($ 29,050 for 2004); joint filers with 2003 taxable income greater than $ 56,800 ($ 58,100 for 2004); and heads of household with 2003 taxable incomes greater than $ 38,050 ($ 38,900 for 2004). We are unable to provide any information about the number of Connecticut taxpayers in various federal tax brackets because, as already mentioned, IRS income distribution data for the state is based on AGI levels rather than taxable income.

Expanded 10% Bracket

In addition to reducing rates in the upper brackets, JGTRRA made more income subject to the lowest (10%) rate. The expanded 10% rate applies to single and joint filers. For the 2003 and 2004 tax years, JGTRRA increased the taxable income subject to the lowest rate from $ 6,000 to $ 7,000 for single filers and from $ 12,000 to $ 14,000 for joint filers. Although under the JGTRRA these limits are in effect only for 2003 and 2004, a 2004 federal tax law (The Working Families Tax Relief Act of 2004, P. L. 108-311) extended them through 2010. Under the 2004 law, the upper limit of the 10% bracket will be indexed for inflation starting in 2005.

For tax years 2003 and 2004, the expanded 10% rate benefits every single taxpayer with a taxable income over $ 6,000 and every joint filer with a taxable income greater than $ 12,000 because even those in higher marginal brackets pay a 10% tax rate on more of their taxable income. As is the case with the change in the marginal tax rates, IRS data for Connecticut does not provide any statistics about the number Connecticut filers whose taxable incomes put them in the various federal tax brackets.

Tables 2 and 3 below show federal income tax brackets in effect for 2003 and 2004 under JGTRRA.

Table 2: 2003 Federal Tax Brackets Under JGTRRA

Table 3: 2004 Federal Tax Brackets Under JGTRRA

Reduced Capital Gains Tax Rates

JGTRRA reduced tax rates on income from capital gains distributions occurring after May 5, 2003. For tax years 2003 through 2008, it reduces the maximum rate from 20% to 15%. For taxpayers in the two lowest brackets (10% and 15%), the law reduces the capital gains tax rate from 10% to 5% for tax years 2003 through 2007 and to zero for 2008.

According to IRS data, 416,235 Connecticut filers reported capital gains income in 2002. Table 4 shows how these taxpayers are distributed by AGI. Although this data provides an indication of how many Connecticut taxpayers receive capital gains income and thus could benefit from lower rates on such income, it does not show how many benefit from the reduced capital gains tax rates under JGTRRA because it does not cover capital gains distributions after May 5, 2003.

Table 4: Connecticut Filers Reporting Capital Gains Income

2002 Tax Year

Reduced Tax Rates for Qualifying Dividends

Before 2003, dividends were taxed as ordinary income. JGTRRA instead sets the maximum tax rate on qualifying dividends at 15% for most taxpayers and 5% for taxpayers in the 10% and 15% income brackets. The 15% rate applies to dividends received in tax years 2003 through 2008. The 5% rate applies from 2003 through 2007 and falls to zero in 2008. The definition of dividends that qualify for the lower rates is complicated but, in general, dividends qualify if they were already taxed as corporate earnings.

According to IRS data, 577,658 Connecticut filers reported dividend income in the 2002 tax year (see Table 5). As is the case with capital gains data, figures shown below relate to the year before JGTRRA’s reduced dividend rate took effect so they provide only an indication of the people who could benefit from the 2003 change.

Table 5: Connecticut Filers Reporting Dividend Income

2002 Tax Year

Child Tax Credit

The JGTRRA moved up a scheduled increase in the child tax credit from $ 600 to $ 1,000 per child to 2003 and 2004. The 2004 law extended the $ 1,000 credit through 2010. IRS data shows that 305,700 Connecticut taxpayers claimed the credit in 2002 (see Table 6). The child-care credit is phased out starting at AGIs above $ 110,000 for joint filers, $ 75,000 for singles, and $ 55,000 for married couples filing separately.

Table 6: Connecticut Filers Claiming the Child Tax Credit

2002 Tax Year

Marriage Penalty Relief

The JGTRRA increased the standard deduction for married couples filing jointly (MFJ) to twice the standard deduction for singles. (Federal tax law allows a taxpayer to choose either to itemize deductions or take the standard deduction. ) For 2003, the change increased the MFJ standard deduction from $ 7,950 to $ 9,500 ($ 9,700 for 2004). The JGTRRA also eliminated the separate standard deduction for married couples filing separately (MFS), making the MFS deduction the same as the standard deduction for singles. For 2003, the law thus increased the MFS standard deduction from $ 3,975 to $ 4,750 ($ 4,850 for 2004). Finally, the law expanded the 15% income bracket for joint filers to twice the 15% single filer bracket (see Tables 3 and 4 above). JGTRRA made these changes effective for 2003 and 2004 and the 2004 tax law extended them through 2010.

According to the IRS, there were 650,804 Connecticut joint returns filed in 2002. This number is 39% of total 2002 Connecticut returns.

Alternative Minimum Tax Exemptions

The federal alternative minimum tax (AMT) was originally enacted to ensure that high-income individuals with access to various tax credits and incentives paid some income taxes. But because the AMT thresholds were not indexed for inflation, the number of taxpayers affected by the AMT has expanded every year.

Taxpayers are subject to the AMT to the extent that their “tentative minimum tax owed” exceeds the amount of their regular tax. The tentative minimum tax is generally equal to (1) 26% of the first $ 175,000 of alternative minimum taxable income (AMTI) in excess of an exemption amount ($ 87,500 for married taxpayers filing separately) plus (2) 28% of remaining AMTI. AMTI is taxable income adjusted for specified preferences.

A specified amount of AMTI is exempt from the 26% and 28% AMT rates, depending on filing status. JGTRRA increased the exemption amounts as shown in Table 7 for 2003 and 2004. The 2004 tax law extended the increased exemptions through 2010. Exemption amounts start to phase out when AMTI exceeds $ 150,000 for joint filers, $ 112,500 for singles, and $ 75,000 for married couples filing separately.

Table 7: AMT Exemptions

There is no data available on the numbers of Connecticut taxpayers subject to the AMT.

INCOME DISTRIBUTION OF JGTRRA TAX REDUCTIONS

Table 8 below shows average tax changes under JGTRRA for each AGI category as estimated by the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. The center is a major provider of income distribution simulations for federal tax changes and its estimates are widely cited since the Treasury Department no longer publishes such information.

We also enclose copies of estimated JGTRRA effects for hypothetical taxpayers published by the Wall Street Journal (May 23, 2003); the Treasury Department (May 22, 2003); and Commerce Clearinghouse, a tax law reporting service. And, for your further information, we enclose a Treasury Department fact sheet showing the estimated numbers of Connecticut taxpayers who benefit from the combined effects of the 2001 and 2003 federal tax reductions.

Table 8: Average JGTRRA Tax Changes by AGI

2003-2004

Sources: Tax Policy Center; IRS

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