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New York’s Response to the 2017 Tax Act

On April 17th, the official “Tax Day” of 2018, Governor Andrew Cuomo signed into legislation New York’s response to the 2017 Tax Act provisions.  The constriction of the state and local tax deduction for income and property taxes under the 2017 Tax Act to $10,000 has adversely impacted New York and other higher income tax state residents.  It is estimated that this limitation will increase federal tax revenue from New York by as much as $14 billion.[1]

The legislation creates state-operated Charitable Contribution Funds for purposes of improving health care and public education in New York State. Separate funds now exist for the each of the foregoing.  For federal tax purposes, charitable contributions remain deductible for individual taxpayers. They are limited generally to 60% of adjusted gross income for donations to public charities.  Hence such an expenditure would remain fully deductible for most taxpayers on their federal taxes.

The new state law provides that any taxpayer donating to either of these funds can also claim a state tax credit in the amount of 85% of the donation. In effect this creates a charitable deductible in lieu of a nondeductible state income tax payment in year following the payment.  It works to offset state income tax liabilities at 85% of the amount paid in the next year.  Payments made on or after January 1, 2018 will be utilizable as a tax credit starting in 2019.

Under the new legislation, local governments are also authorized to establish charitable funds for purposes of education, health care or other charitable purpose to benefit towns, counties, etc. In exchange for such contributions, local governments are authorized to offer real property tax credits likewise at a percentage of the charitable contribution made to the local government.  In effect it allows local governments to create programs that would allow a taxpayer to substitute a charitable contribution payment instead of a nondeductible property tax payment.

Each of these programs represents a state workaround creating a charitable federal deduction for otherwise nondeductible state and local income and real property taxes. The provisions may be challenged by the Service. IRS could argue that the contributions are not truly charitable contributions as there is a state tax credit obtained on payment.  Nevertheless, penalties cannot be assessed if taxpayers are acting in conformity with state sponsored programs.  As of now, it’s authorized legislation.

Employers can also address their employees’ tax liability. Employers will be able to elect to participate in a state Employer Compensation Expense Program (ECET).  Employers electing to participate will pay tax on the annual payroll expense in excess of $40,000 per employee phased in over three years starting with January 1, 2019.  A new tax credit corresponding in value to the Employer Compensation Expense Program will reduce the personal income tax on wages. The payment is fully deductible by the employer as part of compensation but in effect creates a credit in lieu of a nondeductible state income tax expense to the employee.  The program is being phased in over a three-year period with the tax rate for 2019 set at 1.5%; increasing to 3% in 2020 and 5% in all following years.

New York has decoupled from the federal code in a number of salient areas. It now allows taxpayers who have claimed the standard deduction on their federal return in certain circumstances to nevertheless claim itemized deductions on their New York return. In addition, again in departure from federal provisions, the legislation has retained the deductibility of alimony by the payer hence making the income includible by the recipient.  It has also continued to allow the deductibility of moving expenses which are no longer allowed at the federal level.

The 2017 Tax Act promulgated a repatriation tax creating deemed dividend income for any U.S. owners of specified “deferred foreign income corporations” that hold previously untaxed earnings and profits. The statutorily mandated repatriation income flows through 2017 income tax returns of affected taxpayers.  While it is subject to a reduced tax at the federal level, the state income tax treatment of this amount is a separate matter.

The new state legislation specifies that New York corporations are largely exempt from this tax. However, the legislation does not appear to have included an explicit comparable provision for New York individuals impacted by the repatriation tax.

Just prior to the enactment of the legislation, the Department of Taxation and Finance issued Notice N-18-4, which specifically addressed S corporation shareholders that are eligible for a long-term deferral election under the 2017 Tax Act for federal tax purposes. It held that no comparable deferral is allowed for state purposes and hence the entire repatriation amount would be subject to tax in New York in the inclusion year (2017). It also stated that penalties will not be assessed for late payment. Hopefully, this issue will be clarified in the near future as the disparity in treatment is difficult to rationalize.

Contact your Janover advisor for more information.

[1] It is estimated that prior to this legislative change, federal revenues from New York exceeded federal expenditures by over $45 million.

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