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Financial Planning > Tax Planning > Tax Deductions

NY Governor Proposes Tax Changes to Offset Federal SALT Deduction Cap

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New York Governor Andrew Cuomo has introduced amendments to his fiscal 2019 budget to offset the impact of state and local tax deduction (SALT) limits in the new federal tax law.

In a press release announcing the amendments, Cuomo said they were designed “to safeguard our competitiveness and help protect residents from this federal economic assault.”

The new federal tax law limits deductions for state and local income, property and sales taxes to $10,000 per tax return, which sharply reduces the tax deductions for many residents in high-tax states like New York.

(Related: 4 Last-Minute Tax Strategies for Clients in High-Tax States)

According to the New York State Department of Taxation and Finance, without any changes to the state tax system, the SALT limits will cost New York’s taxpayers an additional $14.3 billion per year and risk undermining the competitiveness of the state economy, investments and services for residents and progressivity of its tax system.

(Related: IRS Advice on Property Tax Prepayment Causes Widespread Confusion)

Cuomo is proposing three workarounds to the SALT limits:

  1. The creation of charitable funds to which taxpayers who itemize could donate funds and claim those donations as tax-deductible charitable contributions. Curomo is proposing two state charitable funds — for health care and education — whose donations would be deductible on federal and state tax returns and let donors to claim a state tax credit equal to 85% of the donated amount. His plan also authorizes the creation of similar charitable funds by counties, towns, cities and villages, which would provide a local tax credit equivalent to 95% of the donation.

  2. The creation of an Employer Compensation Expense Tax (ECET) which would essentially shift income taxes to payroll taxes, from employees who can’t deduct those income taxes to employers who can. Employers who opt into the plan would have to pay a 5% tax on annual payroll expenses over $40,000 per employee, phased in over three years, and employees would receive a tax credit equivalent to the value of the ECT.

  3. Decoupling state taxes from the federal tax code so that federal deduction limits, including the $10,000 limit on itemized deductions for state and local taxes, do not apply to state income taxes. Without this change, New York state taxpayers would be subject to more than $1.5 billion in state taxes, according to Cuomo’s office.

These proposals require approval by the New York State Legislature, which is split between Democratic control in the Assembly and Republican control in the Senate. The IRS may also weigh in.

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