Report: Trump Plan Could Cost New Yorkers $72B in State, Local Tax Deductions

John Jordan | October 2017

New York State Comptroller Thomas DiNapoli

ALBANY—New York State residents could lose more than $72 billion in reported income and property tax deductions if the current Big 6 tax reform plan is enacted.

New York State Comptroller Thomas DiNapoli in a report released on Oct. 27th said the tax reform plan calls for eliminating most itemized deductions, including state and local tax deductions, while retaining the home mortgage interest deduction and charitable deductions.

“New Yorkers lose valuable deductions under the proposed changes to the federal tax code. Changes to the standard deduction and personal exemptions could result in higher tax bills for some New Yorkers and only modest savings for others,” said DiNapoli. “Washington should proceed with caution, because these and other changes have far reaching implications that not only hit the bottom line for taxpayers, but could affect state and local finances in ways that are hard to predict.”

On Sept. 27, 2017, Congressional Republican leaders and the Trump Administration released the “Unified Framework for Fixing Our Broken Tax Code.” The framework proposes to consolidate the number of tax brackets, but doesn’t specify the income levels at which such brackets would apply. The framework also calls for eliminating “most” itemized deductions, while retaining those for home mortgage interest and charitable deductions.

Among the deductions the administration has targeted are those for state and local taxes, an issue of particular significance in New York. New Yorkers reported more than $72 billion in such federal deductions in 2015, including $51.7 billion for income taxes and $20.9 billion for property taxes, 13.5% of all state and local tax deductions reported nationwide in 2015.

Taxpayers in certain downstate counties reported high average deductions in this category, including New York County at $60,384, Westchester County at $34,345 and Nassau County at $23,586. In a majority of the counties in New York, taxpayers claiming state and local tax deductions reported more than $10,000 in such deductions.

State and local income taxes and real estate taxes represent the categories with the highest levels of deductions that New Yorkers reported on their federal income taxes, the State Comptroller’s report stated.

Meanwhile, more than one in five taxpayers in the state reported mortgage interest deductions, averaging $8,727, while 29% reported charitable deductions averaging $6,894. The report includes county level figures on New Yorkers’ federal itemized deductions.

The market area of the Hudson Gateway Association of Realtors would be hit hard by the changes to the federal tax code. For example, Putnam County ranked tops in New York State with 51.5% of taxpayers filing returns with itemized deductions and ranked seventh in the state with $31,503 in claimed itemized deductions. A total of 47.0% of Westchester taxpayers itemize deductions (ranked third highest in the state) and averaged $51,208 in claimed itemized deductions, which was the second highest in New York State.

Rockland County came in sixth in the state with 45.0% of taxpayers filing itemized returns and fourth in the state with an average of $36,074 in claimed itemized deductions. Orange County would also be hard hit by the elimination of deductions. The county placed ninth in the state with 39.2% of taxpayers itemizing deductions and 11th statewide with an average of $27,882 in claimed itemized deductions.

The potential revisions to the tax code would consolidate the current standard deduction and personal exemptions into a new, higher standard deduction. However, the impact of these changes is far smaller than the “nearly doubling” of the standard deduction as portrayed in the framework. These changes are further clouded by the framework’s elimination of personal exemptions for dependents. For some taxpayers, these changes could result in additional income tax liability, the report noted.

In 2015, New York taxpayers claimed more than five million dependent exemptions. Under current law, a married couple with two children who claim the standard deduction have a total combined deduction of $28,900. With the proposed change to the standard deduction and the elimination of the personal exemption for dependents, their deduction would decrease by $4,900, a reduction of 17%.

DiNapoli’s report also stated the tax reform framework proposal would:

• Set the corporate income tax rate at 20%, and eliminate the corporate AMT. Corporations now are subject to different tax rates, depending on their income. Current corporate tax rates are 15, 25, 34, and 35%. For those business owners who pay taxes on their firm’s income taxes through the personal income tax, a new single rate could result in a significant increase in taxes.

• Reduce the tax rate on foreign profits of multi-national corporations that are headquartered in the United States; and

• Eliminate the Alternative Minimum Tax (AMT) and the federal estate tax. Both of these taxes currently have bigger impacts in New York than in most other states. In 2015, New York generated 15.6% of AMT payments and 9.4% of federal estate tax payments nationwide. While taxpayers at all income levels are subject to the AMT, it primarily impacts those with incomes ranging from $200,000 to $500,000.

Some of the proposals included in the framework could affect New York tax liability, since provisions in New York’s Tax Law are tied to federal provisions. These include the changes to certain itemized deductions, the child tax credit and depreciation.

Without legislative changes to the state tax law, changes at the federal level could either increase or decrease the state tax burden on New York’s taxpayers, with commensurate impacts on state revenues. Similar impacts could occur with regard to the New York City and Yonkers income taxes, the report concluded.

To read the full report go to: http://www.osc.state.ny.us/reports/budget/2017/federal-tax-framework.pdf

John Jordan
Editor, Real Estate In-Depth