One of the key parts of the 2017 tax law was the reduction of the state and local tax deduction. Filers can’t deduct as much state and local tax as they were before. It’s capped at $10,000.
But states have been trying to find sneaky ways of getting around this. New York recently became the first state to try it. It passed a budget outlining various methods for people to get back the money they would lose from not being able to deduct state taxes on their federal taxes.
New Yorkers have the highest state tax burden in the country, so many New Yorkers were especially annoyed when the new tax bill said they couldn’t deduct as much of that as they used to come tax time.
“Make no mistake about it. It’s an assault on New York,” says Mark Jaffe, president of the New York Chamber of Commerce. He says it’s unfair that high-income New Yorkers are losing out on the tax deduction. “We give more in taxes to the federal government than we get back,” he says.
New York has come up with a few tricks for its wealthier citizens. And states all over the country are watching to see how they go. The tricks all boil down to this: The state income tax isn’t deductible, so New York is turning it into something that is.
New York disguised the not very deductible state income tax as a very deductible charitable contribution to a charitable fund — also known as the state of New York. But also, to some actual charities.
“People will be giving to several funds that New York State sets up,” says David Kamin, professor of law at New York University. “One of the funds is a fund toward health. Another is a fund toward elementary and secondary education.”
What was once a not very deductible state income tax is now, magically, a totally deductible charitable contribution.
“This runs into some serious legal headwinds,” says Jared Walczak, senior policy analyst at the Tax Foundation. “Under current law for something to be claimed as a charitable contribution…it has to be genuinely charitable. The state actually needs to benefit. But they are not benefiting. They’re giving it back as a tax credit.”
But wait. Maybe it will work, says Kamin. “This is based off of plans that the IRS has blessed in other states.”
So who knows how that magic trick will go down. The IRS has yet to say anything.
For New York’s next trick, the state will give taxpayers the option to turn their not very deductible income tax into a very deductible payroll tax. This would be paid by the employer.
“The challenge here is not really a legal one,” says Walczak. “You can almost certainly do this.”
Swapping out an income tax for a payroll tax sounds easy but it’s actually super complicated and employers would have to do some accounting gymnastics that would, on paper, lower wages. “This is going to be very difficult. You have contracts, you have labor agreements, you might have minimum wage issues.”
But it’s an idea that needs to be tested, according to Jaffe: “Some businesses will take advantage but not all businesses will.”
Tested it will be. New York has its magic tricks all laid out. The question is: Will the IRS buy it?