Certain Deductions Can Be Itemized for State Purposes, Even If Not Itemized for Federal Purposes
On December 28, 2018, the Department of Taxation and Finance (the Department) issued Technical Memorandum TSB-M-18(6)I – New York State Decouples from Certain Personal Income Tax Internal Revenue Code (IRC) Changes for 2018 and after. In that TSB, the Department affirmed that the state and federal tax treatment of certain items of income and deductions will differ for tax years 2018 and thereafter.
In particular, the Department explained that individuals may claim some deductions on their New York returns that are no longer available for federal purposes (N.Y. Tax Law §615(a)), including:
- State and local real estate taxes, including amounts over the $10,000 federal limit; and
- Certain miscellaneous deductions that are no longer allowed federally, such as tax preparation fees and investment expenses.
Department Advises That Decoupling Does Not Apply to Non-Grantor Trusts and Estates
After the TSB was released, the question arose as to whether the decoupling extended beyond individuals to non-grantor trusts and estates. IT-205 – Fiduciary Income Tax Return—was silent on that point, and in the absence of specific guidance, most advisors seemed to take the position that real estate taxes over the federal limit and miscellaneous itemized deductions could not be claimed on fiduciary income tax returns.
That position was affirmed in the following guidance posted to the Department’s website:
IT-205-I
Note: For Form IT-205 filers, New York State did not decouple from the new federal rules (under the federal [Tax Cuts and Jobs Act] TCJA) relating to itemized deductions. The information in TSB-M-18-(6)I, New York State Decouples from Certain Personal Income Tax Internal Revenue Code (IRC) Changes for 2018 and after, relating to itemized deductions on New York State individual income tax returns, does not apply to Form IT-205 filers. For instance, Form IT-205 filers are not allowed to deduct miscellaneous itemized deductions (such as investment advisory fees) and cannot deduct any amount of state and local taxes paid that is over the federal $10,000 limit (Updated: March 15, 2019).
New York Executive Budget Does Extend Decoupling to Trusts and Estates
However, the 2020 New York Executive Budget (Part EEE), which passed both houses on March 31, 2019, and was enacted into law on April 12, 2019, does extend the decoupling benefit to trusts and estates (and disallows the IRC §199A deduction). The Department’s website was recently updated as follows:
IT-205-I
Note: The Tax Department is developing guidance to address pending amendments to the New York State Tax Law in the 2019-2020 New York State budget that impact 2018 Form IT-205, Fiduciary Income Tax Return filers with certain deductions. Once signed into law, the amendments related to the deductions listed below will be effective retroactive to January 1, 2018:
- IRC section 199A deduction;
- deduction for foreign real property taxes;
- deduction for taxes under IRC section 164 that was limited to $10,000; and
- miscellaneous itemized deductions disallowed under IRC section 67(g).
If you are concerned with how these changes may affect your 2018 return, request an extension of time to file. Sign up for the Subscription Service for personal income tax to receive an email announcement regarding the future guidance (Updated: April 09, 2019).
On April 30, 2019, the Department’s website was updated to reflect the fact that Governor Cuomo did sign the Executive Budget into law on April 12, 2019. The instructions just posted include the following guidance:
IT-205-I
Note: See the below up-to-date information for 2018 Form IT-225-Iif you have any of these deductions:
- IRC section 199A deduction;
- deduction for foreign real property taxes;
- deduction for taxes under IRC section 164 that was limited to $10,000; or
- miscellaneous itemized deductions disallowed under IRC section 67(g).
IT-225-I
1. On page 5, above addition modification A-201, add the following:
A-120 IRC section 199A deduction
If an estate or trust was allowed a deduction under IRC section 199A in computing federaltaxableincome, then enter the amount of that deduction.
2. On page 13, above subtraction modification S-201, add the following:
S-138 State and local tax deduction other than state and local sales taxes and income taxes
If an estate or trust claimed a deduction for taxes under IRC section 164 that was limited to $10,000 as provided in IRC section 164(b)(6)(B), or that was denied under IRC section 164(b)(6)(A), then enter the amount of state and local taxes that the estate or trust was not able to deduct for federal income tax purposes because of such limitation or denial, other than state and local sales taxes and income taxes as described in Tax Law § 615(c)(1).
Note: In determining the makeup of the $10,000 of deduction claimed by the estate or trust under IRC section 164, it shall be presumed that the $10,000 first comprises the state and local income taxes (or sales taxes, if applicable) the estate or trust accrued or paid during the taxable year.
S-139 Miscellaneous itemized deductions
If an estate or trust had miscellaneous itemized deductions, as described in and limited by IRC section 67 (excluding the deductions described in section 67(e)), that the estate or trust was not able to deduct for federal income tax purposes due solely to IRC section 67(g), then enter the amount disallowed under IRC section 67(g).For a full description of the modifications, see the following link:
https://www.tax.ny.gov/forms/income_up_to_date_info.htm#IT-205-I
What Should You Do?
These modifications apply to taxable years beginning in 2018.
For returns that have not yet been filed, these may be valuable deductions to take, and should be claimed. Many returns will already have been filed. If so, advisors should consider filing amended returns.
Additional Decoupled Provisions
TSB-M-18(6)I affirms that New York has decoupled from certain other federal changes for tax years 2018 and thereafter, including the following:
Alimony Continues to Be Deductible
Until 2019, alimony payments were characterized as taxable income to the recipient and deductible by the payer (IRC §§ 71(a) and 215(a)). With the spouse paying alimony likely to be in a higher income tax bracket than the recipient spouse, the recipient potentially could pay taxes on the alimony at a lower rate. This bracket play often resulted in overall tax savings between the parties. Pursuant to federal changes effected by the 2017 Federal Tax Cuts and Jobs Act (the Federal Tax Act), alimony payments made pursuant to a divorce or separation agreement signed after December 31, 2018 will no longer be treated as taxable income to the recipient or be deductible by the payer. New York has decoupled from the federal treatment of alimony payments, so alimony can be subtracted from federal adjusted gross income in computing New York taxable income (N.Y. Tax Law §612(w)).
529 Plan Withdrawals for K-12th Grade Tuition Are Nonqualified
A 529 plan is an investment account created for the purpose of paying educational expenses of a designated beneficiary. Funds invested in a 529 plan will accumulate and grow federal income tax free, and if the funds are used for qualified educational expenses (such as tuition, room and board, fees, books, supplies, and equipment for college [IRC §529(e)(3)]), funds are exempt from federal income tax. New York accords similar favorable tax treatment to 529 plans and allows taxpayers to take an income tax deduction up to $5,000 ($10,000 for a married couple filing jointly) for contributions to New York‘s 529 plan.
As a result of changes effected by the Federal Tax Act, as of January 1, 2018, 529 plans (up to $10,000 annually) can now be used to pay for tuition for elementary and secondary schools for federal tax purposes. According to the TSB, however, New York limits qualified withdrawals to post-secondary educational institutions. Withdrawals for tuition payments to elementary or secondary schools will be considered nonqualified.
Sharon L. Klein is president of Family Wealth, Eastern Region, for Wilmington Trust, N.A. She is responsible for coordinating the delivery of all Wealth Advisory Services by teams of professionals, including planning, trust, investment management, family governance and education, family office, and private banking services, to high net worth clients in the Eastern United States. Sharon has over 25 years of experience in the wealth advisory arena, including 11 years as a practicing attorney, and is a nationally recognized speaker and author. She is a Fellow of the American College of Trust and Estate Counsel and a member of the New York Bankers Association Trust & Investment Division Executive Committee, The Rockefeller University Committee on Trust and Estate Gift Plans, the Professional Advisory Council of the Anti-Defamation League, the Estates, Gifts and Trusts Advisory Board for The Bureau of National Affairs, and the Thomson Reuters Trusts & Estates Advisory Board. Sharon is Chair of the Domestic Relations Committee of Trusts & Estates Magazine, where she sits on the Board, and a member of the New York City Bar Association’s Matrimonial Committee. She is a past Chair of the New York City and New York State Bar Association’s Trusts & Estates Committees. Sharon is on the Board of Directors of the American Brain Foundation, and a member of its Finance Committee. She can be reached at 212-415-0531or sklein@wilmingtontrust.comwww.wilmingtontrust.com.
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