NYC Council Bills Would Set Workarounds for Federal Deduction Cap

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By John Herzfeld

The New York City Council is trying to make it easier for taxpayers to work around new federal deduction limits that are plaguing high-tax states.

Tax specialists say three bills proposed Oct. 31 are a long shot.

The proposals follow the pattern of measures adopted by New York state in March to give taxpayers ways to lessen the impact of the $10,000 cap placed on state and local tax deductions set in the 2017 federal tax law (Pub. L. 115-97). But chances are low that the approach taken in the city council bills, if enacted, would pass muster with the Internal Revenue Service, specialists said.

Two of the bills would establish a charitable gifts reserve fund (Intro. No. 1213) and set a city property tax credit equal to 95 percent of a taxpayer’s unrestricted donation to the fund (Intro. No. 1200).

A third bill (Intro. 1212) would call for the Finance Department and other city agencies to recommend steps by the end of 2018 to mitigate the impact of the SALT deduction limit on taxpayers.

New York was the first state to enact the charitable gift workaround, with other high-tax states following suit. But in August, the IRS proposed rules that would shoot down the plans by requiring donors who receive a state or local tax credit to reduce any federal deduction for that contribution by the amount of the credit.

New York, Connecticut, New Jersey, and California protested the IRS’ stance in rulemaking comments submitted Oct. 11, but tax specialists don’t expect the IRS to back off.

The agency’s proposed rules “are certainly within the bounds of existing jurisprudence,” Richard D. Pomp, the Alva P. Loiselle professor of law at the University of Connecticut School of Law, told Bloomberg Tax in an email.

‘Tilting at Windmills’

Pomp called the council’s approach “tilting at windmills.” The IRS’ position is that only the 5 percent non-creditable amount of a donation to a city fund would be deductible as a charitable contribution, he said.

“If the council is so confident about this working, they should offer to hold all taxpayers harmless from any IRS penalties and interest charges that will be imposed on audit,” Pomp said.

Legal challenges by New York and other states to overturn the 2017 tax law don’t “have a tinker’s damn chance of success,” he said.

Little Impact Seen

The council bills are well-intentioned but probably wouldn’t do much to shield New York City taxpayers from the impact of the deduction limit, Jennifer Abelaj, a senior counsel at the New York law firm Davidoff Hutcher & Citron LLP who works on trusts and estate planning, told Bloomberg Tax.

“As a New Yorker and someone who advises New York residents, I think it’s encouraging that the state and city are still trying to look out for their taxpayers, but it doesn’t seem like the plans will pass muster with the IRS,” Abelaj said.

The biggest hit from the SALT deduction cap comes from personal income taxes, not property taxes, she said, and property taxes in any case are lower in the city than in its surrounding suburbs. So the relief offered to city taxpayers would only be partial, even if the IRS were to back the approach.

Average salaried taxpayers “will be the most disproportionately affected, since they lack the ability to set up trusts, LLCs, or other alternative vehicles to work around the cap,” she added. Pay levels in New York are generally higher than in most of the rest of the U.S., driving up the impact of the cap, she noted.

Request Daily Tax Report: State