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SALT TALK: Written in Reverse – Federal Tax Overhaul and Impact on the States

Posted by Wayne K. Berkowitz CPA, J.D., LL.M. on Jan 2, 2018 9:17:00 AM
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I'm writing this to you in reverse . . . No nothin' was planned . . . I've seen you blankly stare . . . I can see it all from here . . . From just a few glimpses . . . Now that lightbulb's gone off . . .

I apologize for the reference so soon again, to the band Spoon, but with just a little rearranging of the lyrics to their song “Written in Reverse, “ it becomes apparent to me that back in 2009 they must have been anticipating what state tax practitioners would be thinking upon the next major overhaul of the Internal Revenue Code.

While all of the questions and issues raised by the new federal tax law’s impact are a long way from being answered, I wanted to provide my readers with a preliminary and far from all-inclusive list of potential state and local issues we all need to start thinking about now.

Should I move?
With the deduction for state and local income and property taxes being capped at $10,000 interest in residency planning and making that escape to a no or low tax jurisdiction is definitely on the uptick. High tax states tend to have expensive housing and the further limited deduction for home mortgage interest and the elimination of the deduction for any new home equity debt is also increasing the number of queries. Sorry to tell you that the moving expense deduction has been eliminated beginning in 2018.

Will my State respect the new deduction for pass-through income?
Much of the excitement and confusion surrounding the federal tax changes stems from the ability of taxpayers to take a twenty percent haircut (with many restrictions beyond the scope of this blog) off the top from qualified business income received from a partnership, S corporation or sole proprietorship. State tax laws are generally drafted in one of several ways. Either they adopt the Internal Revenue Code (IRC) as enacted by a certain date, automatically adopt the IRC as amended or in some cases not adopt the IRC at all. Within these approaches, states vary as to whether the starting point is taxable income, gross income, net income or some other amount.

Will my State recognize the temporary 100% cost recovery of qualifying business assets?
While one might think the answer to this question hinges upon whether the jurisdiction in question automatically adopts the IRC as amended, states have historically seen accelerated depreciation methods, bonus depreciation, section 179 deductions and now a 100% deduction of certain asset purchases as an expense, as a serious hit to the state tax base. Historically they have acted quickly to decouple from these gifts from the feds. What will happen this time is anybody’s guess, but I think many states will take away this benefit.

This list barely scratches the surface of the impact the Tax Cuts and Jobs Act is going to have on state and local taxes. There are still many moving pieces which will impact the federal tax bill let alone at least fifty times for the potential state iterations. Don’t write your plan in reverse. State taxes need to be considered alongside federal planning for the Act.

I’ve raised some questions and there will be more. If you have questions about this wave of change, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor. 

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation. 

Topics: SALT TALK

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