DRS: 12-701(a)(20)-2, Modifications increasing federal adjusted gross income

DRS has reproduced this regulation. This is an unofficial copy. Official copies of regulations ONLY are available from the Commission on Official Legal Publications, 111 Phoenix Avenue, Enfield, CT 06082,  colp@jud.state.ct.us. Copies of DRS forms and publications are available at http://www.ct.gov/drs.

Conn. Agencies Regs. ß 12-701(a)(20)-2.  Modifications increasing federal adjusted gross income.

(a) The following items are to be added to federal adjusted gross income in computing the Connecticut adjusted gross income of a resident individual:

(1) Interest income on obligations issued by or on behalf of any state or of a political subdivision, or public instrumentality, state or local authority, district or similar public entity of any such state, and interest income on obligations issued by or on behalf of the District of Columbia, to the extent not properly includible in federal adjusted gross income.  However, interest income on Connecticut obligations is not to be added to federal adjusted gross income. Furthermore, interest income on obligations issued by or on behalf of any territory or possession of the United States (such as Puerto Rico, Guam and the Virgin Islands), or a political subdivision or public instrumentality, authority, district or similar public entity thereof, the taxation of which by any state is prohibited by federal law, is not to be added to federal adjusted gross income.

Example: Interest income received by a resident individual on bonds issued by or on behalf of the State of California and the District of Columbia shall be added to her federal adjusted gross income in arriving at her Connecticut adjusted gross income, as this interest income is subject to Connecticut income tax but not to federal income tax. However, interest income received by such individual on bonds issued by or on behalf of Guam and the State of Connecticut is not to be added to federal adjusted gross income, as this interest income is not subject to Connecticut income tax.

(2) Any exempt-interest dividends, as defined in section 852(b)(5) of the Internal Revenue Code. However, exempt-interest dividends derived from Connecticut obligations are not to be added to federal adjusted gross income. Furthermore, exempt-interest dividends derived from obligations issued by or on behalf of any territory or possession of the United States (such as Puerto Rico, Guam and the Virgin Islands), or a political subdivision or public instrumentality, authority, district or similar public entity thereof, the direct taxation of which by any state is prohibited by federal law, are not to be added to federal adjusted gross income.

Example: A resident individual receives $1000 in exempt-interest dividends from a mutual fund that owns governmental obligations issued by various states, including Connecticut, and by the Territory of Guam. If 45% of the exempt-interest dividends was derived from Connecticut obligations, 20% from New York obligations, 10% from Massachusetts obligations and 25% from Guam obligations, then the amount that is to be added to federal adjusted gross income is $300 (that is, the percentage of exempt-interest dividends that is not derived from Connecticut obligations and other obligations, the direct taxation of which by any state is prohibited by federal law). The percentage of.exempt-interest dividends derived from Connecticut obligations and Guam obligations is not to be added to federal adjusted gross income.

(3) Interest or dividend income on obligations or securities issued by or on behalf of any authority, commission or instrumentality of the United States, which the laws of the United States exempt from federal income tax but not from state income taxes.

(4) To the extent includible in gross income for federal income tax purposes for the taxable year, the total taxable amount of a lump sum distribution deductible from such gross income in calculating federal adjusted gross income pursuant to section 402(d)(3) of the Internal Revenue Code.

(5)(A) To the extent properly includible in determining the net gain or loss from sales or other dispositions of capital assets for federal income tax purposes, any loss from the sale or exchange of Connecticut obligations, in the taxable year such loss was recognized, whether or not, for federal income tax purposes, gains from sales or other dispositions of capital assets exceed losses therefrom.

(B) Example 1: A resident individual has, for federal income tax purposes, a long-term capital loss of $4,000 arising from the sale of Connecticut obligations and a long-term capital loss of $3,000 arising from the sale of bonds issued by the State of Florida.   Accordingly, the individualís federal adjusted gross income shall be increased by $4,000, the amount of loss arising from the sale of the Connecticut obligations even though this amount exceeds the losses allowable under section 1211(b) of the Internal Revenue Code.

Example 2: Resident individuals who file a joint Connecticut income tax return have, for federal income tax purposes, a long-term capital gain of $5,000 arising from the sale of stock and a long-term capital loss of $2,000 arising from the sale of Connecticut obligations. Any loss from the sale or exchange of Connecticut obligations is required to be added to federal adjusted gross income, to the extent properly includible in determining the net gain or loss from sales or other dispositions of capital assets for federal income tax purposes, in the taxable year such loss was recognized, even if, for federal income tax purposes, gains from sales or other dispositions of capital assets exceed losses therefrom. Accordingly, the federal adjusted gross income of these individuals shall be increased by $2,000, the amount of loss derived from the sale or exchange of the Connecticut obligations.

(6) To the extent deductible in determining federal adjusted gross income, the amount of Connecticut income tax paid or accrued. However, to the extent deductible from federal adjusted gross income in determining federal taxable income, the amount of Connecticut income tax is not to be added back to federal adjusted gross income..

(7)(A) Interest expenses on indebtedness incurred or continued to purchase or carry obligations or securities, the income from which is exempt from Connecticut income tax, to the extent such expenses are deductible in determining federal adjusted gross income. However, to the extent such expenses are deductible from federal adjusted gross income in determining federal taxable income, the amount of such expenses is not to be added back to federal adjusted gross income.

(B) Example: A resident individual is a partner in a partnership that borrows money to purchase United States savings bonds, the income from which is exempt from Connecticut income tax. The partnerís share of the interest expense paid during the taxable year on this indebtedness is $200. To the extent that such expense is deductible by the partner in determining her federal adjusted gross income, she shall add this amount back in computing her Connecticut adjusted gross income.

(8)(A) Expenses paid or incurred during the taxable year for (i) the production or collection of income which is exempt from Connecticut income tax or (ii) the management, conservation or maintenance of property held for the production of income which is exempt from Connecticut income tax or (iii) the amortizable bond premium for the taxable year on any bond, the interest income from which is exempt from Connecticut income tax, but only to the extent that such expenses and premiums are deductible in determining federal adjusted gross income. To the extent such expenses and premiums are not deductible in determining federal adjusted gross income but are deductible from federal adjusted gross income in determining federal taxable income, these expenses and premiums are not to be added back to federal adjusted gross income.

(B) Example: A nonresident individual is a partner in a Connecticut partnership that purchases shares in a mutual fund that invests solely in United States government obligations. The income therefrom is fully taxable for federal income tax purposes. The partnerís share of expenses paid during the taxable year to produce this income is $100. To the extent that such expenses are deductible by the partner in determining his federal adjusted gross income, he shall add this amount back in computing his Connecticut adjusted gross income.

(9) With respect to an individual who is a shareholder of an S corporation carrying on business in Connecticut (as the term is used in Section 12-214 of the general statutes, and as defined in Section 12-214-1), the amount of such individualís pro rata share of the corporationís nonseparately computed loss (as defined in Section 12-701(b)-1 of Part XIV), to the extent such loss is included in computing such individualís federal adjusted gross income, multiplied by the corporationís apportionment fraction, if any, as determined under Section 12-218 of the general statutes (irrespective of whether the S corporation shall pay the additional tax under Section 12-219 of the general statutes).

(b) While this section pertains to Section 12-701(a)(20) of the general statutes, for purposes of supplementary interpretation, as the phrase is used in Section 12-2 of the general statutes, the adoption of this section is authorized by Section 12-740(a) of the general statutes.

(Effective November 18, 1994.)