‘Capitol Connection’ Check Your Income Tax Withholding

August 18, 2011

Many folks living in the 8th Senate District and throughout the state have had a number of questions pertaining to the increase in the income tax.

On August 1st, the state of Connecticut increased the number of income tax brackets from three to six with the top marginal income tax rate increased to 6.7%. This income tax increase is also retroactive to January 1st of this year, meaning that those affected will be making up and paying seven months of higher taxes over the next five months – beginning in January of 2012 the state will only be collecting the increased rate. I’m sure most of you at home have already noticed the tax increase.

Although this retroactive tax does not seem ethical, it is not illegal. Our state’s constitution does not prohibit the legislature from voting to increases taxes or to make them retroactive. That said, I did not support the Governor or the Democratic majority in voting for this increase in tax, or making the tax retroactive (which is the first time this has ever been done in the State of Connecticut).

The increase in this tax also unfairly affects a large number of Connecticut workers. In early August the state Department of Revenue Services (DRS) announced that there are now limitations in software used for payroll processing, impacting income tax withholding for certain Connecticut taxpayers. This problem adversely impacts taxpayers who have requested on Form CT-W4 that additional income tax be withheld from their paychecks.

According to DRS it looks like current software systems are not able to differentiate between voluntary withholding amounts and regular tax withholding when calculating and accounting for the retroactive withholding for the current year. This means that these taxpayers may no longer be withholding the correct amount – or that they are under-withholding and liable for the difference come April 15, 2012.

Unfortunately, if you are in this position, you will likely have to take additional steps to protect yourself. The DRS Commissioner advises taxpayers withholding additional income to make estimated tax payments in order to assure that enough tax is paid to meet the ‘safe harbor’ of paying in at least as much as the amount of the last annual income tax due (provided a 2010 Connecticut income tax return spanning a 12 months was filed). If you do so, DRS states that you will not have to worry about interest or unpaid amounts when filing your 2011 income tax return.

Those most affected by this problem are wage workers or hourly employees who withhold additional amounts because of overtime pay. If you think you may be impacted by this, I urge you to talk to your employer or to contact DRS about proper withholding information. In an effort to try and help taxpayers estimate their 2011 income tax, DRS has posted the 2011 Estimated Income Tax Worksheet and the updated 2011 Income Tax Calculation Schedule to the department’s website – www.ct.gov/drs.

On the bright side of all this tax-talk, you and your families can look forward to a tax free holiday this week. Beginning Sunday, August 21st and continuing though Saturday, August 27th the state will be implementing the annual one-week sales and use tax exclusion. During this week all clothing and footwear costing less than $300 per item will be tax free. The exemption also applies to exchanges, rain checks, rentals, and certain internet purchases of clothing and shoes. Check the DRS website at www.ct.gov/drs for more details and questions. So between the tax headaches and lighter wallets, I hope this tax break is a help to you and all those families headed back to school.

PS. Someone asked me if the tax break is only for school children size clothing and the answer to that question is no. It is applicable to all size clothing and to non-students as well. Happy Shopping!!