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- New York last week passed a budget that included two tax workarounds to avoid a feature of the Republican tax law.
- One change would allow companies to shift some income taxes to payroll taxes.
- The other would set up a charitable trust for New Yorkers to donate taxes as “charity.”
- A policy analyst says the changes are legally dubious and could end up hurting New Yorkers.
New York state is trying to help residents avoid a hit from the new Republican tax law, but experts say it could come back to haunt taxpayers.
Under the new law, residents in high-tax states can deduct up to $10,000 in state and local taxes instead of an unlimited amount, as they could in previous years.
“We passed the first-in-the-country tax reform where we changed our tax code to actually avoid the penalty of the federal government,” Gov. Andrew Cuomo said.
To get around the new federal changes to the so-called SALT deduction, New York set up two avenues.
- Would convert income tax that applies to workers to a payroll tax paid by employers, which could then be deducted to retain more tax savings.
- Gross pay would be lower but made up through a tax refund, designed to result in higher total pay.
- It’s unclear whether workers and companies would be willing to make that trade-off.
- Would set up a charitable trust to which residents could donate.
- The trust would transfer funds to tax-supported programs, allowing residents to use the charitable donation deduction to make up for the loss of the SALT deduction.
Jared Walczak, a senior policy analyst at the Tax Foundation, said that while the legality of both of these schemes was dubious, the charity move in particular would not fly with the IRS.
“The IRS is highly unlikely to go along with this charade, as these so-called contributions bear none of the hallmarks of genuine charity,” Walczak said in a blog post on Monday.
Walczak also said the scheme could end up costing New Yorkers more than it would save them.
“One hopes that the IRS will clear up any uncertainty with formal guidance before taxpayers try to take advantage of this legally dubious scheme, but if that doesn’t happen, New York could be setting its residents up for a fall,” he wrote. “They could face audits; they might be exposed to tax penalties; and their tax liability could actually go up.”
According to Walczak, the charitable-fund scheme would work if the IRS were to disregard potential problems:
“If the IRS were to smile upon this scheme, high-income New Yorkers and the state government both win (though all other taxpayers, subsidizing this largesse, lose): the taxpayer gets a $100,000 federal tax deduction, worth $37,000 in lower federal taxes if all of it is exposed to the top marginal rate, while New York collects more revenue from that taxpayer than it otherwise would. On net, New York is up $10,000 and the wealthy taxpayer is up $27,000.”
But the IRS could disallow the scheme, which Walczak thinks is likely because Cuomo and other officials have billed it as a way to avoid federal taxes. In that case, a New York taxpayer who overshoots their tax liability by $10,000 would not be able to recover that loss, he said.
A slew of other states, including California and Illinois, are also considering similar workaround schemes to prevent residents from losing the SALT deduction.