New York State Responds to Federal Tax Reform (Part 2) – Decoupling from the Federal Tax Code

We released Part One covering New York State’s Response to Federal Tax Reform at the end of May.  You can find that post here.  In this post we are digging deeper into New York State’s thoughts on decoupling from the Federal Tax Code to protect New York State Taxpayers from Tax increases.

NY’s income tax system conforms to the federal system in multiple ways. The numerous changes to the federal tax law will have significant flow-through effects on NY. The budget proposes multiple steps to disengage from the federal law. See the following for reforms related to this:

Erie canal with boats and buildings on a summer day in Fairport, New York

A. State and local tax deduction cap NY income tax returns require that the state itemized deduction start with the deduction claimed on the federal return; meaning the states itemized deduction will also be capped at $10,000. This would result in a lower itemized deduction at the state level, therefore the legislation proposed to move away from this federal law.

B. Maintain the Standard deduction for single filers The federal tax law suspends personal exemptions, which would impact the state standard deduction for single filers. Currently, the state law eligibility for the standard deduction for single filers is applicable to individuals who are “not married, nor head of household, nor an individual whose federal exemption amount is 0.” The reason for this language is to prevent taxpayers who are claimed as a dependent, to claim the single filer deduction of $8,000. As the current law stands, those that are claimed as a dependent, receive a personal exemption of $0 and therefore only receive a state standard deduction of $3,100. If NY were to keep the law the same with the federal law changes, a single taxpayer receives $0 as a personal exemption & would have a lower standard deduction of $3,100, instead of the $8,000. Legislation proposes to maintain the state standard deduction for single filers of $8,000.

C. Decouple from other itemized deduction limitations Under current NY state tax law, taxpayers that claimed the standard deduction on their federal return must also claim the standard deduction on their state return. Legislation proposes eliminating the requirement that taxpayers can only itemize on their NY return if they itemize on their federal return. If NY were to keep the law as is, an increased number of NY filers would be claiming the standard deduction, as the new tax law has a higher standard deduction.

D. International- The budget amends the definition of “exempt CFC income” by included income received from a corporation that was not included in a combined report with the legislation. Legislation does requires an addback for the interest expense that was deducted for federal. Legislation excluded the 37.5% foreign-derived intangible income federal deduction from NY income. Additionally, the subtraction for dividends allowed by Section 78 are allowed to the extent that dividends are not deducted under foreign-derived intangible income.

E. Other Miscellaneous tax provisions-

  • A subtraction would be allowed for qualified moving expenses. Additionally, a subtraction would be allowed for any amounts paid as alimony and separate maintenance payments and an addition would be required for any amounts received as alimony or separate maintenance payments. This is effective beginning on January 1, 2018
  • The statute of limitations for amended returns is extended to allow assessments to be made at any time within one year after the amended return is filed.
  • The state’s commercial credit can be used independently of the federal homeowner rehabilitation credit, beginning January 1, 2018.
  • The empire state child tax credit amount will remain the same.
  • To determine an individual’s statutory residency you must count all days that the individual is present in NY, regardless of whether an individual is domiciled in the state during the taxable year.
  • The musical theatrical production credit is extended for 4 additional years after January 1, 2019.
  • NY hire a veteran tax credit is extended for two years, through 2020.
  • A 50% increase in the youth jobs program credit for qualified employers is available for years beginning January 1, 2018.
  • Beginning on January 1, 2019, a surcharge is imposed on for-hire transportation trop that originates in a “congestion zone.” The “congestion zone” includes Manhattan, south of & excluding 96th street. The rate for the surcharges are $2.75 on for-hire vehicles (including Uber & Lyft), $2.50 for yellow cabs & $.75 for pooled vehicle trips.
  • The definition of a “limousine” is amended to include any vehicle with the seating capabilities of between 15 & 20 persons, not including the driver and it only has two axles & four tires. A “bus” is defined as any motor vehicle with a seating capacity of at least 15 people, not including the driver and does not qualify as a limo.
  • Sales for resale of food and beverages by restaurants, taverns & other establishments are excluded from sales & use tax beginning on June 1, 2018.
  • For certain minority partners of limited partnerships & members of LLCS can receive relief from per se responsible person sales tax liability. Eligibility includes if they were not under a duty act to comply with the requirements of the sales tax & if their ownership interest and the percentage of their distributive shares are less than 50%.
  • The sales tax credit for certain drugs and medicines used by veterinarians or farmers is now an upfront exemption, effective June 1, 2018.
  • The property tax assessment ceiling program for telecommunications property is extended by four years, until January 1, 2023. In 2021, these ceilings will no longer be tied to 2014 assessments. The ceiling for an assessment cannot deviate from 25% in 2018, 50% in 2019 & 75% in 2020.
  • Enhanced STAR recipients must be enrolled in the STAR Income Verification Program. This is effective for applicants for 2019.
  • NY low income housing credits can be transferred, regardless of any federal low income housing credit for the low income building allocations, effective on January 1, 2019 for buildings that receive a low income housing credit allocation on or after May 12, 2018.

For additional questions on the New York State Budget Bill reach out to a member of our business tax or personal tax team today.