Substitute Senate Bill No. 1558 seeks to amend the income tax credit provisions for Connecticut residents who pay taxes to other jurisdictions on income also subject to Connecticut tax. The bill repeals and replaces subsection (a) of section 12-704 of the general statutes, allowing residents and part-year residents to claim a credit for such taxes. A significant change introduced is a reduction of the credit by 1% for income derived from services rendered while the taxpayer was in Connecticut, which is expected to generate an estimated revenue gain of $3.5 million annually starting in FY 27. Additionally, the bill clarifies that the credit cannot reduce the tax liability below what would be owed if the income taxed by the other jurisdiction were excluded from Connecticut adjusted gross income.

Moreover, the bill mandates the Attorney General to conduct a study on potential actions to protect Connecticut residents from being taxed by other states on income earned while working in Connecticut, with a report due by January 1, 2026. It also establishes a new tax credit for residents who successfully challenge the imposition of taxes by other states, allowing them to receive a credit equal to 50% of the taxes owed to Connecticut as a result of such challenges. The bill prohibits penalties for late payment of Connecticut income taxes if the delay is due to a reduction in the existing credit caused by a refund from another jurisdiction. The new provisions will apply to taxable years beginning on or after January 1, 2020, with the changes to the existing credit effective January 1, 2026.