Decoupling in New York Explained: New York Issues More Post TCJA Guidance

This promises to be the most “exciting” tax season ever for your friendly neighborhood accountants! It makes me a little relieved that I declined to follow in the footsteps of my father and grandfather (both CPAs) and turned to the legal world instead! With so many changes in the federal tax law, it’s going to be tough for accountants (and software companies) to keep up. And because most states’ tax laws are based on federal law or use federal tax rules as a starting point, so many of these federal changes will flow-through to state tax returns as well.

But not all. In the state tax world, the term we use for this is “decoupling.” I suppose it’s better than “divorcing.” The idea is that although New York tax law, for example, would adopt federal tax provisions since federal adjusted gross income is used as a starting point, the State can decide to go a different route, and not follow (or “decouple” from) the federal law. Over the course of 2018, the State did just that in a few areas. And just a week or so ago, the Tax Department put out guidance (in TSB-M-18(6)) to summarize this decoupling, at least on the income tax side. Here’s a short summary:

New York State Itemized Deductions

You may choose to itemize your deductions for New York State purposes for tax years 2018 and after, even if you did not itemize on your federal income tax return. New York opted not to follow many of the federal itemized deduction changes made by the TCJA for tax years 2018 and after, so you may be able to claim some deductions on your New York personal income tax return that are no longer available for federal purposes. Some of the deductions you can now claim are for: 

• state and local real estate taxes paid, including amounts over the $10,000 federal limit (this is a big deal in for high income taxpayers living in high property tax areas);
• casualty and theft losses, including those incurred outside a federally declared disaster area;
• unreimbursed employee business expenses; and
• certain miscellaneous deductions that are no longer allowed federally (e.g. tax preparation fees, investment expenses, and safe deposit box fees).

Alimony or separate maintenance payments

Again, New York opted not to follow changes made by the TCJA to the treatment of alimony or separate maintenance payments made under an alimony or separation agreement that was executed or modified after December 31, 2018. New York requires taxpayers, when calculating their NY adjusted gross income (NYAGI) to: 

• subtract from your federal adjusted gross income (FAGI) any applicable alimony or separate maintenance payments you made in the tax year, and
• add to FAGI any applicable alimony or separate maintenance payments you received in the tax year.

Qualified moving expenses reimbursement and moving expenses

New York also opted not to follow changes made by the TCJA to the deduction for moving expenses and to the exclusion from gross income (wages) for moving expenses reimbursements for tax years 2018-2025. New York will continue to allow you to exclude a qualified moving expenses reimbursement and moving expenses from your NYAGI. Therefore, when calculating your NYAGI, you must subtract from FAGI: 

• any applicable qualified moving expenses reimbursement you received in the tax year; and
• any qualified moving expenses you paid during the tax year.

529 college savings account

Moreover, New York opted not to follow changes made by the TCJA to the types of withdrawals that are allowed from a Qualified Tuition Program (QTP) account established under IRC § 529. Hence, in New York, withdrawals for kindergarten through 12th grade school tuition are not qualified withdrawals under the New York 529 college savings account program.

Additionally, for New York purposes, a withdrawal is “nonqualified” if the withdrawal is actually disbursed in cash or in-kind from a New York State 529 college savings account and the funds are not used for the higher education of the designated beneficiary. Higher education generally means public or private, non-profit or proprietary post-secondary educational institutions, in or outside New York State. Therefore, any withdrawal from a New York 529 college savings account used to pay tuition in connection with enrollment or attendance at elementary secondary public, private, or religious schools is a nonqualified withdrawal.

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