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Taxes as charity: LI lawmaker proposes way around fed tax hit

Assemb. Steven Englebright (D-Setauket) on Sept. 12, 2016.

Assemb. Steven Englebright (D-Setauket) on Sept. 12, 2016. Credit: Joseph D. Sullivan

ALBANY — Looking to circumvent part of a new federal tax plan, a Long Island assemblyman proposed a bill Thursday that would allow New York homeowners to make donations to a charitable statewide education fund in lieu of paying local school taxes.

The donations would be fully tax deductible, allowing homeowners to skirt a new federal restriction on the deductibility of property taxes, under legislation formally proposed Thursday by Assemb. Steven Englebright (D-Setauket).

Under Englebright’s plan, a homeowner who owes, say, $15,000 in local school taxes could pay it in full to the newly created “Excellence in Public Schools Fund” through the New York State-income tax filing. That “gift” would be fully deductible on a federal filing. The payment would be transferred to the homeowner’s local school district.

It mirrors a taxes-as-charity concept Gov. Andrew M. Cuomo and lawmakers from other states have been exploring as a way to get around a new federal law that caps the deduction for local taxes paid at $10,000, an amount that won’t cover many downstate homeowners.

“Local real property taxes have been deductible from federal income since 1913. If we do not address this federal change, homeowners will suffer from a higher tax burden and school children from the predictable loss of school resources,” Englebright said in a statement.

The assemblyman claimed his proposal would allow taxpayers to “avoid the full negative effect” of the federal tax law recently signed by President Donald Trump.

But it is uncertain whether the U.S. Treasury Department would approve of such machinations. The agency is skeptical of the charitable “tax workaround” that New York, New Jersey, California and other states are openly considering, according to numerous reports.

At a Jan. 25 conference in Washington, Thomas West, the agency’s counsel on taxes, noted taxpayers cannot get a credit for donations when they get something of value from the charity in return — and the school charity idea sounds a lot like that. West said the agency could use the “substance over form” doctrine to challenge the legality of such schemes, The Wall Street Journal reported.

“The IRS is highly unlikely to go along with this,” E.J. McMahon, research director of the fiscally conservative Empire Center think tank, said of Englebright’s proposal.

Further, one element of the federal tax law might make the deductibility issue moot for some: By doubling the standard federal deduction (to $24,000 for couples), hundreds of thousands of New Yorkers who currently itemize their tax returns might no longer need to do so.

Cuomo has floated several ideas for circumventing the tax law, including creating a similar charitable fund and switching from state income taxes to state payroll tax — though, there too, critics have questioned the feasibility.

Short of a tax-law overhaul, Senate Republicans have backed a plan to limit some of the damage on the deductibility issue by calling for decoupling state returns from federal returns.

Any changes would have to be included in a state budget, which the governor and lawmakers are supposed to adopt by April 1, the start of New York’s fiscal year.

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