New York Offers Workaround to Itemized Deduction Limits

| 5/3/2018
New York Offers Workaround to Itemized Deduction Limits

New York Gov. Andrew Cuomo signed the state’s 2018-19 budget bill on April 17. The bill includes two provisions designed to mitigate the effect of the new $10,000 limit on individual state and local tax itemized deductions.

Employer Compensation Expense Tax

The budget bill creates a new employer compensation expense tax that provides employers the option to elect to be subject to a new payroll tax. Electing employers would remit an annual payroll tax on payroll expenses paid to covered employees (all employees subject to New York withholding with annual wages of more than $40,000) at the rate of 1.5 percent in 2019, and gradually rising to 5 percent in 2021. Employers that elect to remit the tax will incur a payroll tax expense that is deductible for federal tax purposes, and their employees are allowed to claim a credit against their New York state personal income tax for the amount, which would reduce their state tax liability and mitigate the effect of the $10,000 itemized deduction limit of the Tax Cuts and Jobs Act (TCJA). It is unclear at this time if the payroll tax giving rise to the individual income tax credit will be W-2 wages to the employee.

The election must be made before Dec. 1, 2018, to be effective for wages paid in 2019.

Charitable Funds

Another provision of the budget bill establishes two state-operated charitable funds, which also are intended to mitigate the effect of the TCJA’s $10,000 limit. Under this provision, individual taxpayers who make contributions to these specific charitable funds are allowed to claim a credit equal to 85 percent of their contributions against their New York state personal income tax and real estate property tax liabilities. The income tax credit will be available in the year after the contribution is made and first will be available in 2019 for contributions made in 2018. Credits against real estate property tax will not be available until cities and towns adopt statutes enabling the credit. The legislation presumes that a federal charitable contribution deduction will be available for the contributions to the state-operated charitable funds.

It remains to be seen how the IRS will respond to this legislation and similar legislation in other states. As a result, taxpayers should proceed with caution.