Mismatch for Decoupling in New York: Trusts and Estates Not Covered!

A few months ago, we wrote about the recent guidance that the Tax Department issued about itemized deduction decoupling (TSB-M-18(6)). The guidance addresses New York State’s decoupling from the federal treatment of deductions for individuals, but it was not initially clear whether these changes also apply to trusts and estates.

The guidance clarified the changes made to New York Tax Law, including Sections 615 and 612, and that the tax law allows an individual to itemize for state purposes even if they choose the standard deduction for federal.  Section 615 allows an individual to take the itemized deductions that were permitted at the Federal level before the recent Tax Cuts and Jobs Acts, so the individual can deduct items on his personal income tax return that he might not have been able to on his federal return. In addition, Section 612 provides that an individual’s New York adjusted gross income (AGI) means his Federal AGI with the modifications specified, including the deductions for alimony or separate maintenance payments and qualified moving expense reimbursements and moving expenses detailed in the guidance.

If you take a close look at the amendments to Sections 615 and 612, as well as the TSB-M, they only reference deductions for individuals.  Unlike the statutes relating to individuals, the relevant trusts and estates statutes were not modified in last year’s budget law or in this year’s proposed budget. We reached out to senior members of the Tax Department, who confirmed that the decoupling only applies to individuals.  And on March 15^th, one month before the filing deadline for individuals and trusts, the Tax Department posted guidance to its website to clarify certain tax form instructions for the 2018 tax year.  Included in these clarifications is an addition to the IT-205-I General Changes to confirm that for Form IT-205, New York State did not decouple from the new federal rules on itemized deductions.  Thus, Form IT-205 filers are not allowed to deduct miscellaneous itemized deductions or state and local taxes paid over the federal $10,000 limit.

So, the starting point for trusts and estates remains federal AGI. Clearly, New York is trying to help individuals who may be hurt by the Tax Cuts and Jobs Acts, but it does not seem to have the same concern for individuals who are beneficiaries of a trust.

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