November 7, 2005 |
2005-R-0837 | |
VETERANS’ TAX QUESTIONS | ||
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By: Judith Lohman, Chief Analyst | ||
You asked (1) if veterans who are 100% disabled are exempt from paying Connecticut income tax on their income and (2) what income must be counted towards qualifying income for veterans’ property tax exemptions.
INCOME TAX EXEMPTION FOR DISABLED VETERANS
There is no state income tax exemption for veterans who are 100% disabled. Veterans must calculate their Connecticut taxable income in the same way as all other Connecticut income taxpayers. The calculation starts from federal adjusted gross income (AGI). Federal AGI is adjusted for Connecticut additions and subtractions to calculate Connecticut AGI. Tax liability is then determined by applying personal credits and exemptions to Connecticut AGI. (See Tables 1 & 2, attached, for a list of the types of income included and excluded from federal AGI and for Connecticut additions and subtractions to federal AGI. )
QUALIFYING INCOME FOR INCOME-LIMITED VETERANS’ PROPERTY TAX EXEMPTIONS
State law provides several mandatory property tax exemptions for veterans and also allows municipalities to provide optional exemptions. Many of these exemptions are available only for veterans whose incomes
are below certain thresholds. (See OLR Reports 2002-R-0273 and 2003-R-0689 for fuller descriptions of the various veterans’ property tax exemptions. )
The law specifies two alternative methods of counting “qualifying income” for these property tax exemptions. For most veterans, “qualifying income” means the veteran’s federal AGI plus all his other income (CGS § 12-81l). For veterans with 100% Veterans’ Administration disability ratings, qualifying income is limited only to federal AGI and excludes other income (CGS § 12-81g(a)). Thus, for veterans who do not have 100% disability ratings, qualifying income includes income excluded from federal AGI, such as nontaxable Social Security retirement and disability benefits and nontaxable interest income.
Regardless of a veteran’s disability status, qualifying income excludes:
1. Social Security payments a veteran receives for a dependent person;
2. insurance proceeds for casualty losses;
3. gifts, bequests, and inheritances (though income produced by the gift, bequest, or inheritance must be included);
4. disaster relief grants;
5. income from certain volunteer service stipends earned from programs under the 1973 federal Domestic Volunteer Act, including the Foster Grandparents and Retired Senior Volunteer programs;
6. life insurance proceeds;
7. spouse’s Social Security income, if the spouse lives in a Connecticut nursing home or health care facility and receives Medicaid; and
8. food stamp allotments. (Question and Answer Booklet for the Owners’, Totally Disabled, and Additional Veterans’, Tax Relief Programs, Office of Policy and Management, January 2005).
Applications for veterans’ property tax exemptions are filed and approved by municipal tax assessors.
TABLE 1: FEDERAL ADJUSTED GROSS INCOME
• Included |
• Excluded |
• Wages, salaries, and tips • Taxable interest • Dividends • Taxable refunds, credits, or offsets of state and local income taxes • Alimony received • Business income (or loss) • Capital gains (or losses) • Other gains (or losses) • Taxable IRA distributions • Taxable pensions and annuities • Rental real estate, royalties, partnerships, S corporations, trusts, etc. • Farm income (or loss) • Unemployment compensation • Taxable Social Security benefits • Other income |
• Educator expenses • Certain business expenses of reservists, performing artists, and fee-based government officials • IRA deduction • Student loan interest deduction • Tuition and fees deduction • Health savings account deduction • Moving expenses • 50% of self-employment tax • Self-employed health insurance deduction • Self-employed SEP, SIMPLE, and qualified plans • Penalty on early withdrawal of savings • Alimony paid |
Source: 2005 IRS Form 1040
TABLE 2: CONNECTICUT AGI MODIFICATIONS TO FEDERAL AGI
Additions |
Subtractions |
• Interest on non-Connecticut state and local government obligations • Exempt-interest dividends from a mutual fund derived from above • Pro-rata share of certain S corporation losses (applies only to shareholders of S corporations that were subject to state corporation tax in 2000 and that have a federal taxable year other than a calendar year) • Taxable lump-sum distributions from qualified plans not included in federal AGI • Taxpayer’s share of any Connecticut modifications that apply to income from an estate or trust (“fiduciary adjustment”) • Loss on sales of Connecticut state or local government bonds • Federally reportable treaty income (for nonresident aliens) • Certain losses or deductions of an enrolled member of the Mashantucket Pequot Indian Tribe living in Pequot country • Connecticut income tax deducted on federal return to arrive at federal AGI • Expenses paid or incurred for production or collection of income exempt from Connecticut income tax that were deducted on federal return to arrive at federal AGI • Amortizable bond premiums producing interest income exempt from Connecticut income tax, if the premiums were deducted to arrive at federal AGI • Interest or dividend income on obligations of a U. S. entity that federal law exempts from federal, but not state, income taxes • For income tax years starting January 1, 2002, federally deductible bonus depreciation allowance on certain property acquired between September 10, 2001 and September 10, 2004 and placed in service before January 1, 2005 |
• Interest on federal obligations • Dividends from qualifying mutual funds derived from federal obligations • Exempt Social Security income (up to 100% depending on income) • State and local income tax refunds • Tier I and II railroad retirement benefits and supplemental annuities • Pro rata shares of certain S corporation income (applies only to shareholders of S corporations that were subject to state corporation tax in 2000 and that have a federal taxable year other than a calendar year) • Taxpayer’s share of any Connecticut modifications that apply to income from an estate or trust • Gain on sales of Connecticut state or local government bonds • Federally taxable distributions received as a designated beneficiary from the Connecticut Higher Education Trust • Certain income or gains of an enrolled member of the Mashantucket Pequot Indian Tribe living in Pequot country • Qualifying, federally taxable, Holocaust settlement payments • Federally taxable interest earned on funds deposited in a Connecticut individual development account • Interest paid on indebtedness incurred to acquire investments that provide Connecticut taxable but federal tax-exempt income, if not deductible in determining federal AGI and attributable to the taxpayer’s trade or business • Amortizable bond premiums producing interest or Connecticut taxable income, if the premiums are not deductible to determine federal AGI and are attributable to the taxpayer’s trade or business • Federally taxable interest on Connecticut state bonds or obligations • Starting in the 2008 tax year, 50% of military retirement pay |
Source: Instructions for 2004 Form CT 1040; PA 05-251 §§ 71-73
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