EAlert: NYS Enacts Tax Workarounds

On April 12th, Gov. Andrew Cuomo signed into law the New York State budget bill, that among other things, created an employer payroll tax and new charitable contribution funds to offset the impact of the $10,000 federal cap on state and local tax deductions under the Federal Tax Cuts and Jobs Act.

In the plan, the Governor expanded charitable contributions to benefit New Yorkers by creating two state-operated charitable contribution funds—one for healthcare and one for education. Taxpayers may make a donation to one or both of these funds and then will get a corresponding charitable contribution deduction for federal and state tax purposes in the current year.

They will also get a state tax credit equal to 85% of the amount of the donation on the next year’s tax return, to offset subsequent years NYS tax expense. This credit will be available for tax years beginning after December 31, 2018.

The State will also authorize school districts and other local governments to create these same charitable organizations, which will be funded through charitable donations from the taxpayers, who in return for making a contributions will receive a reduction in their local property taxes (via a real estate tax credit) equal to a percentage of the charitable donation.

The new legislation creates an alternative method to traditional state income tax withholding on employer wages.  The employer compensation expense tax (ECET) was enacted in order to combat a lack of deductibility of state and local taxes for individuals. Effective for 2019 tax year, employers will be able to opt into a new structure where the employer pays a 5% annual payroll tax on employee salaries in excess of $40,000 per employee.

This employer payroll percentage will be phased in over 3 years, with 1.5% allowed for 2019, 3.0% for 2020 and 5% for 2021.  The deadline to for an employer electing into this program for 2019 is December 1, 2018.

The state will also eliminate the requirement that taxpayers may only claim an itemize deduction if they also itemize on their Federal income tax return.  The state will also create certain modifications for alimony deductions and moving expenses to help combat the Federal tax law changes.