Drew Angerer/Getty Images New York Governor Andrew Cuomo
- New York 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 taxes from income taxes to payroll taxes.
- The other would set up a charitable trust for New Yorkers to donate taxes as "charity."
- According to experts, the changes are legally dubious and could end up hurting New Yorkers.
The state of New York is trying to help residents avoid a hit from the new Republican tax law, but experts say it could come back to haunt taxpayers in the state.
As part of a budget deal reached Friday, New York will set up two different ways for residents to capture the full state and local tax deduction in the form it existed before the recently implemented GOP tax law. Under the new federal law, residents in high-tax states can only deduct up to $10,000 in state and local taxes instead of an unlimited amount, as 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 Friday.
To get around the new federal changes to the state and local tax, or SALT, deduction, New York set up two different avenues.
The first:
- Would convert income tax that applies to workers to a payroll tax that is 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 - for a higher total pay.
- Whether or not workers and companies would be willing to make that trade-off remains to be seen.
The second:
- 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 both of these schemes are of dubious legality. But he said the charity move in particular will not fly with the Internal Revenue Service.
"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 wrote in a post for Tax Foundation 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," the analyst wrote. "They could face audits; they might be exposed to tax penalties; and their tax liability could actually go up."
The charitable fund scheme would work, according to Walczak, if the IRS turns a blind eye to the idea. Here's how, per the post:
"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 said is likely since Cuomo and other officials have blatantly billed it a federal tax avoidance scheme. In that case, the taxpayer actually would overshoot their tax liability by $10,000 and would not be able to recover that loss, he said.
New York's move comes as a slew of other states, including California and Illinois, are also considering similar workaround schemes to prevent residents from losing the SALT deduction.