PNF CPA – NJ & NY State Response to Tax Reform

The new tax reform laws have inspired a variety of emotions in businesses and business owners across the country. Depending on how big your business is and where you live, the tax reform laws have created confusion, elation, disappointment, celebration and frustration. If you happen to live in states like New Jersey and New York, which are high-taxed states to begin with, these new laws are most likely causing you to feel the confusion and frustration.

To further complicate the issue, the IRS issued a statement in May 2018 announcing that they would thwart efforts by New York and New Jersey legislators who are trying to pass state-level provisions to the federal tax code. Since this is already a challenging issue and also involves a certain level of politics, PNF CPA is here to serve as your trusted expert to guide you through these tax reform changes and help you figure out how they might directly impact you. Here’s what you need to know:

The Backstory: New Jersey and New York Fight The IRS

When Congress passed the tax reform bill in December 2017, it included a $10,000 limit on the federal deduction for both state and local taxes. Worried about how this change would affect their high-taxed residents, lawmakers in New York and New Jersey passed legislation that allowed people to get local tax credits for donations to local governments.

In in April 2018, Governor Andrew Cuomo of New York was the first Governor to sign a bill in defiance of the new tax law that gave local governments the power to set up charitable funds to which New York taxpayers could make tax-deductible contributions and receive a property tax credit equal to 95 percent of the donation in the following fiscal year. In addition, the New York state bill allowed employers to opt into a payroll tax system that could cut liability on tax wages over $40,000 through the use of tax credits.

New Jersey Governor Phil Murphy signed a bill that allowed municipalities to issue local tax credits in May 2018, which the IRS is now calling illegal. The New Jersey Attorney General, Gurbir Grewel, wrote a letter to the IRS that calls attention to the fact that they have recognized the taxpayers’ ability to receive credit for charitable contributions to government agencies since 2011.

Although the IRS didn’t explicitly release the details of their policy changes, the statement they released in response to these state changes was as follows:

“Despite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.”

In layman’s terms, the issue is this: New York and New Jersey are concerned about their residents essentially getting taxed twice on property taxes that exceed the federal cap, and the IRS wants to override the legislation passed in those states.

What This Means For You

The Tax Policy Center performed a study on the impact that the new tax reform bill would have on individuals across income groups and state lines. Their research found that New Jersey had the highest rate of tax increases, with 10.2 percent of taxpayers estimated to pay higher federal taxes for 2018. Close runners-up were Maryland, Washington, D.C., California and New York, which had about 8.3 percent of taxpayers estimated to pay higher federal taxes in 2018.

While seemingly partisan political battles play out in the news media, the reality is that a higher percentage of taxpayers in those five states will not see the benefits of the tax reform unless the IRS recognizes the changes they are trying to make at the state level. Since the IRS currently allows taxpayers in other states to use similar credits for things like private school scholarships, it’s currently unclear how this will ultimately play out prior to Tax Day 2019.

Be sure to check back in with the PNF Resource Center in the coming months for updates about this issue and how it might affect you and your business.

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