New York Budget Bill Includes Tax Provisions

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Last week, New York's legislature passed its annual budget bill. It contains a variety of tax changes involving corporate franchise, personal income, property, and sales and use taxes.


Several of the changes address the Tax Cuts and Jobs Act restriction limiting state and local tax deductions to $10,000. These workarounds would allow New Yorkers to convert income or real estate taxes into expenditures not subject to the limits. It is unclear whether such methods will ultimately be allowed by the IRS - Treasury Secretary Steven Mnuchin called one proposal "ridiculous" earlier this year.


One new provision focuses on salaries and wages. Starting in 2019, New York employers who choose to opt into a new program would be subject to a phased-in tax on employee wages that exceed $40,000 - 1.5% in 2019, 3% in 2020, and 5% thereafter. Employees would get an equivalent credit on their New York tax income tax. Their take-home pay will remain the same, but the earnings will create less state income tax subject to the deduction cap. The first annual election for employers to opt in to this alternative system is October 1, 2018 for the 2019 tax year.


The budget also creates two new state-operated charitable contribution funds. Starting in 2019, taxpayers who contribute to these funds, which benefit health care and education initiatives, can deduct their payments as charitable deductions on their federal and state returns. Then, in the following year, they will receive a credit on their state tax return equal to 85 percent of the donation. A similar provision allows school districts and local governments to set up funds that would allow taxpayers to make charitable contributions, then reduce real estate tax bills by an amount equal to a percentage of the donation.


The legislation provides relief to certain non-managing minority members of LLCs and limited partnerships. Before the change, New York law treated such silent partners as "responsible persons" that were liable for a portion of the entity's sales tax trust fund obligation despite their limited liability protection.


The budget eliminates a requirement that allowed taxpayers to itemize deductions on their New York returns only if they also itemize their federal deductions. It also creates new state modifications related to alimony and moving expenses, both benefits that were affected by the recent federal law.


There are some the tax highlights of the New York budget bill. Its impact will vary for different taxpayers - for example, out-of-state workers could be negatively impacted by the payroll or charitable fund initiatives. And the Internal Revenue Service has yet to weigh in on these state decisions. At LM Cohen we are watching these developments and are committed to keeping you informed.


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