Itemized Deductions


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I told you that the Tax Cut and Jobs Act (sic) was partly created (or maneuvered) as political retribution by the GOP against those states that don’t vote their way. (Here’s but one  example.)  Which was the driving force behind the plot to outlaw State and Local Tax (SALT) deductions of $ 10,001 or more.  Which would allow the U.S. Treasury collect some $ 650 billion more over the 8 years that this restriction is in effect.  (The personal tax rate changes under this Act expire in 2026.)

But, many of those states (New York, Connecticut, California, New Jersey, DC, Illinois, Minnesota, Massachusetts, Maryland , and Oregon) aren’t standing still under this assault.  (OK, three of those states are in the wings, but we’ll get to them soon enough.)

Right now, one of the biggest states hurt by this plan is New York.  And, it is about ready to approve a radical change.  Instead of a personal income tax, New York is preparing a new employer-paid state payroll tax.  And, the employer-paid payroll tax is deductible to employers on their federal returns.  So, New York is made whole and its citizens aren’t hurt by the GOP approved law.  And, the businesses that “pay” this tax have the costs totally deductible to them.

Moreover, since only some 30% or so of taxpayers in New York had itemized their deductions in 2016, and this new law covers ALL employees, this change will lower the federal coffers even more.  Because now ALL employer-paid state taxes will be deductible and not subject to federal taxation.

High SALT states (state taxes)

Of course, these is a problem.  Most states (the Commonwealth of Virginia is a prime exception, with only three rates, 3%, 5%, and 5.75%- with the top rate cutting in at $ 17K of taxable income) have progressive income taxes.  The more one makes, the higher the tax rate one pays.  (You do realize that the more one makes, even if the tax rate is static, the more taxes one pays.  But, the burden becomes much smaller in proportions as incomes rise if the rate is static.)

Under this new New York tax program, a progressive rate will be more difficult.  As would be dealing with folks who have multiple employers or with state residents who work in a neighboring state.  (The metropolitan New York area, which covers parts of the states of New York, New Jersey, and Connecticut operate as one large employment pool.  The same situation obtains for Northern Virginia, DC, and a good portion of Maryland [aptly called the DMV].)

Of course, the IRS feels this program could affect the liability of the taxpayer.  And, of course, there is no proof behind that allegation.  (It WILL cost the treasury significant funds- because Connecticut ($ 7.5 billion) and New Jersey ($ 12.5 billion) are planning to add this to their arsenals.)

However, New Jersey is also considering a charitable donation fund to support education and health care in the state, which would be a legal, itemizable deduction.  But, that would only be true for those residents who have more than $ 24,000 in deductions.  Because the new law dropped the personal exemptions completely and coalesced a good portion of that (personal exemption) deduction into the much higher standard deduction of $ 24K.

California ($ 66.8 billion) poses special problems in its response to PL117-95.  If they convert to a payroll tax, that would be considered a tax increase, even though it is only a shift in burden payment.  And, increases in taxes require a 2/3 vote in both the Senate and the Assembly.  And, reducing income taxes may require a constitutional amendment, to boot.

But, you can bet that these states will be reacting to protect their citizens- and their treasuries.Roy A. Ackerman, Ph.D., E.A.

Tomorrow, we’ll discuss an issue in this new law that many of my clients have chosen to refuse to believe.  (Their beliefs are immaterial; it’s the facts that matter.)

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