The other subtraction applies to a provision of the New York income that has no counterpart in Connecticut ' s tax. New York allows its residents who itemize deductions on their federal returns to itemize New York deductions in lieu of taking a standard New York deduction. If the taxpayer chooses to itemize on his New York taxes, he must modify his total federal deductions by adding and subtracting certain New York items.
Among the New York subtractions is annual amortizable bond premium for any bond whose interest is federally tax-exempt but taxable in New York i. Of these, six California, Illinois, Massachusetts, Minnesota Nebraska, and Wisconsin specify, either on their state income tax form or in their instructions, that taxpayers should use the amount they entered on Line 8b of their federal form or A for out-of-state municipal bond tax-exempt interest as the add-back on their state return.
As already described, the amounts on Line 8b exclude amortizable bond premiums paid on such bonds. The tax forms and instructions for the remaining five states do not address amortizable bond premiums or expenses on out-of-state municipal bonds. Connecticut ' s bond premium subtraction provision was enacted in , which was the year after the enactment of the Connecticut income tax PA , May Special Session. It was one of many revisions, additions, corrections, and clarifications in income tax law.
Many of the changes were highly technical and related to such things as how the tax applied to nonresidents and to trusts and estates. Most of the provisions, including the bond premium deduction, were copied directly from New York ' s income tax law. The bond premium deduction Connecticut adopted in is virtually identical to the New York statute already described that allows the same deduction. According to Fred Clark, an attorney with the Department of Revenue Services DRS , Governor Weicker directed the department to incorporate New York ' s income tax provisions into Connecticut ' s new tax law because of 1 New York ' s proximity to Connecticut; 2 the comprehensiveness of New York ' s income tax laws and regulations; 3 the extensive history of its tax rulings and case law, which could be used to administer the same provisions in Connecticut; and 4 the fact that New York ' s tax law was already familiar to the many Connecticut residents who work in that state.
The specific rationale for the bond premium deduction cannot be established from the legislative history. PA , May Special Session was introduced as an emergency certified bill and therefore had no public hearing. But most of its provisions, including the bond premium deduction, were included in a bill considered in the regular session as HB Develop and improve products. List of Partners vendors. A taxable municipal bond is a non-tax-exempt fixed-income security issued by a local government, such as a city, county, or related agency, to finance projects that the federal government will not subsidize.
Taxable municipal bonds are generally issued to finance an activity that is deemed not to provide a major benefit to the public. This means that the federal government will not grant a tax-exemption status to these projects. A prominent feature of most municipal bonds is that they are tax-exempt. A municipal bond is a bond issued by local and state governments to fund projects for the betterment of the community, such as building schools, highways, and hospitals.
A municipality may also issue a bond on behalf of a private company, which may be otherwise unable to obtain financing for the project. These private activity bonds PABs attract private businesses, which results in more jobs in the area. An investor who buys a municipal bond is lending money to a municipality that promises to pay interest periodically until the bond matures, at which point the principal investment is repaid to the investor. In order to encourage investors to purchase municipal bonds, the bonds are set up as exempt from federal taxes and some state taxes , depending on the situation and individual state laws.
However, the tax-exempt status of municipal bonds is only granted if the projects funded from the proceeds of the issue provide a significant benefit to the community at large—in other words, the public. While many investors will choose municipal bonds for the tax benefit despite the lower yield, there may be taxable bonds available that offer an after-tax yield that is higher, depending on the individual's current tax bracket. The majority of taxable municipal bonds are issued to finance the shortfalls of state and local pension funds.
Other situations where taxable municipal bonds may be issued include financing local sports facilities, funding infrastructure-related repairs or investor-led housing, or refinancing debt. BABs were created under the American Recovery and Reinvestment Act ARRA of and, although taxable, have special tax credits and federal subsidies for either the bond issuer or holder.
Taxable municipal bonds are popular among institutional investors and mutual funds that cannot take advantage of other tax breaks. Interest from municipal bonds issued to finance projects with no obvious public benefits is taxable since the federal government will not subsidize the financing of these projects.
The risks and benefits of each option will vary depending on a number of individual factors. Some taxable municipal bond issues are exempt from state and, often, local taxes, in which case, investors who reside in the state of issuance are not taxed on their interest earnings at the state level.
Securities and Exchange Commission. Internal Revenue Service. Accessed May 20, Municipal Bonds. Connecticut State Department of Revenue Services. Background: Generally, the taxation of interest income for Connecticut income tax purposes is the same as its taxation for federal income tax purposes. In the case of certain bonds or obligations issued by the United States U.
The interest of some may be taxable for federal income tax purposes, but not for both. This Policy Statement contains lists of such obligations, including a list of: Exempt obligations, the interest from which is subtracted from federal adjusted gross income in computing Connecticut adjusted gross income see List A ;. Exempt obligations, the interest from which is not includable in federal gross income, therefore no subtraction is made from federal adjusted gross income in computing Connecticut adjusted gross income see List B ;.
Taxable obligations, the interest from which is includable in federal gross income, therefore no addition is made to federal adjusted gross income in computing Connecticut adjusted gross income see List C ; and. Taxable obligations, the interest from which is added to federal adjusted gross income in computing Connecticut adjusted gross income see List D. Statutory Authority: Conn. Agencies Regs. Supreme Court described four characteristics of such obligations: Written documents;.
The bearing of interest;. A binding promise by the U. Specific Congressional authorization which also pledged the faith and credit of the U. For example: Interest received on a federal income tax refund is not interest received on a U.
Interest received on obligations which the U. Interest required to be paid by the U. Where a person the seller other than the U. Any interest paid by the U. State and Municipal Government Obligations: 26 U. Exempt-interest dividends are properly not includable in federal gross income.
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