New York State’s Treatment of Certain Federal Tax Cuts and Jobs Act (TCJA) Provisions
The TCJA brought about many federal changes to both personal and business taxes. Many states starting point in determining taxable income is federal income which lead them to decouple from certain changes. New York State (NYS) is one of them.
With respect to personal income tax, the NYS Department of Taxation and Finance has put out guidance highlighting its tax treatment of various federal items of income, deductions and credits. Specifically, it issued TSB-M-18(6). Below are the highlights:
Alimony or separate maintenance payments
NYS opted not to follow changes made by the TCJA to the treatment of alimony or separate maintenance payments made under an alimony or separation agreement that was executed or modified after December 31, 2018. NYS requires taxpayers, when calculating their NYS adjusted gross income (NYAGI) to:
- subtract from federal adjusted gross income (FAGI) any applicable alimony or separate maintenance payments made in the tax year, and
- add to FAGI any applicable alimony or separate maintenance payments received in the tax year.
Qualified moving expenses reimbursement and moving expenses
NYS opted not to follow changes made by the TCJA to the deduction for moving expenses and to the exclusion from gross income (wages) for moving expenses reimbursement for tax years 2018-2025. NYS will continue the exclusion for qualified moving expenses reimbursement and moving expenses from NYAGI. Therefore, when calculating NYAGI, a subtraction from FAGI must be made for:
- any applicable qualified moving expenses reimbursement received in the tax year; and
- any qualified moving expenses paid during the tax year.
529 College Savings Account
NYS opted not to follow changes made by the TCJA to the types of withdrawals that are allowed from a Qualified Tuition Program (QTP) account established under IRC § 529. Thus, for NYS purposes, a withdrawal is nonqualified if the withdrawal is actually disbursed in cash or in-kind from a New York State 529 college savings account and the funds are not used for the higher education of the designated beneficiary. Higher education generally means public or private, non-profit or proprietary post-secondary educational institutions, in or outside NYS.
Therefore, withdrawals for kindergarten through 12th grade school tuition are not qualified withdrawals under the NYS 529 college savings account program.
NYS does not provide for this deduction.
The NYS dependency exemption continues as in the past.
Bonus Depreciation and Section 179 Expensing
For tax years beginning after December 31, 2002, NYS does not allow the federal special depreciation deduction for Internal Revenue Code (IRC) section 168(k) property (except for resurgence zone property and NYS liberty zone property described in IRC section 1400L(b)(2)), placed in service inside or outside NYS after May 31, 2003. Instead, a NYS depreciation deduction is determined under IRC section 167, as that section would have applied to the property if it had been acquired on September 10, 2001.
The Section 179 expense limitation is limited to $25,000. However, the Section 179 expense deduction is not allowed for SUVs over 6,000 pounds, except for eligible farmers.
With respect to an interest in a passive activity, the modifications required under NYS Law for federal depreciation and NYS depreciation must be made for the full amount allowable as a federal depreciation deduction (100%), even though the activity may be subject to federal loss deduction limitations.
Beginning in 2018, NYS allows a taxpayer to itemize their deductions even if taking a standard deduction for federal tax purposes. In general, the NYS itemized deductions would be equal to what the federal itemized deductions would have been prior to the enactment of TCJA. In order to capture these deductions, NYS issued Form IT-196 and associated instructions.
Below is a highlight of some specific itemized deductions:
Medical and Dental Expenses
For federal purposes, medical and dental expenses that exceed 7.5% of federal adjusted gross income (“FAGI”) can be deducted. For NYS, the 7.5% is increased to 10% (Form IT-196, line 4).
For federal purposes, state and local taxes paid in 2018 is limited to a combined amount not to exceed $10,000 ($5,000 if married filing separate). In addition, foreign taxes you paid on real estate are no longer deductible. For NYS, state and local taxes paid in 2018 are not subject to the federal limit (Form IT-196, lines 5, 6, and 7) and foreign taxes you paid on real estate are deductible (Form IT-196, line 8).
The itemized deduction rules for home mortgage and home equity interest paid in 2018 for federal purposes have changed from what was allowed as a deduction for tax year 2017. For NYS, these changes do not apply (Form IT-196, lines 10 and 11).
Gifts to Charity
Federally, the itemized deduction limitation for certain cash contributions has increased from 50% to 60% of FAGI. For NYS, the limitation for these cash contributions remains at 50% of FAGI (Form IT-196, lines 16 and 17).
If there is a carryover of a charitable contribution from an earlier year, the Deduction limits worksheet on page 4 of Form IT-196-I cannot be used. Instead, see the Carryovers section of IRS Publication 526 for more information.
Casualty and Theft Losses
For federal purposes, an itemized deduction for a casualty or theft loss cannot be claimed unless it is the result of a federally declared disaster. For NYS, it can be (Form IT-196, line 20). However, for a casualty loss that is the result of certain federally declared disasters (Form IT-196, line 37), see Other miscellaneous deductions.
Job Expenses and Certain Miscellaneous Deductions
For federal purposes, job expenses and certain miscellaneous deductions that were subject to the 2 percent of FAGI limitation can no longer be claimed as an itemized deduction. NYS allows these deductions to be taken (Form IT-196, lines 21 through 24).
Other Miscellaneous Deductions
For federal purposes, the rules for deducting 2018 gambling losses have changed. For NYS, gambling loss deductions are limited to the amount of gambling income reported. Other miscellaneous deductions are claimed on Form IT-196, lines 29 through 37.
Change to the Empire State child tax credit
In computing the Empire State child credit for NYS, the amount of the current tax year’s federal child tax credit or additional child tax credit is no longer used. The Empire State child tax credit will now be based on the 2017 federal credit amounts and income. The 2018 Form IT-213, Claim for Empire State Child Credit, has been updated to reflect these changes.
With respect to business tax, NYS did not issue formal guidance as their current tax law remains in effect. Below are some highlights:
Interest Expense Limitation
The federal interest expense limitation (including the carryforward) should apply for NYS since the starting point in computing entire net income is federal taxable income.
Bonus Depreciation and Section 179 Expense
Net Operating Loss Limitations
The federal NOL limitation should not apply because, for tax years beginning after 2014, the NYS NOL is defined as the amount of a corporation’s “business loss” multiplied by its apportionment factor. NYS law expressly provides that the NOL deduction is not limited by the amount allowed for federal purposes under IRC § 172. The carryback limitation and indefinite carryforward also should not apply, since the law expressly provides NOLs may be carried back for three years and carried forward for up to 20 years.
If you would like additional information please contact Steven J. Eller.