NY’s complicated and questionable new tax credit

by E.J. McMahon |  | NY Torch

Governor Cuomo and the Legislature are about to add another gnarly twist to the state’s heavily cluttered personal income tax code with their agreement to create a new “Family Tax Credit.” The credit, as widely reported, is designed to put a $350 check in about a million mailboxes starting “on or before October 15″ in 2014 — within three weeks of the next statewide election. It would expire after 2016.

The credit is targeted to residents of New York State who have at least one child aged 17 or younger under 17 and adjusted gross income of $40,000 to $300,000.  However, in order to determine who gets a check in the mail, the state Department of Taxation and Finance will need to rely on the latest information it has available — which will come from 2012 tax returns (those IT-201 forms New Yorkers have to file before April 15).

As a result, although this is supposed to be a break against 2014 taxes, the language in the new revenue bill says eligibility will be decided on the basis of family, income and tax status as of “the taxable year two years prior to the taxable year in which the credit is allowed,” which means2012.  For each of two succeeding years, eligibility also will be based on the tax return filed two years earlier.

Inevitably, thousands of those $350 checks will be delivered in the fall of 2014 to people who were eligible for the credit in 2012 but will no longer be eligible in 2014.

Conversely, although the statutory language refers to that $350 as an “advance” on a credit against taxes for years 2014-16, people who only become eligible for the credit in 2013 or 2014won’t be getting the check next year.

The big open question is this: if a family qualifies for the credit in 2014, can they still claim the credit on the final tax return filed in early 2015?  The bill says, in part: “When a taxpayer files his or her return for the taxable year, such taxpayer shall reconcile that (family tax credit) payment on his or her return.” But what “taxable year” does that language refer to — 2012 (the basis for determining eligibility) or 2014 (the year for which the $350 check serves as an advance credit against taxes)?

If families eligible for the credit in 2014 can claim that $350 as part of the refund due for the return they file in early 2015, does that mean the state will also require families who were eligible in 2012, but no longer eligible in 2014, to pay back the $350 in the same fashion?  The Department will need to issue rules to resolve such questions.

Another complication: the new credit is linked to income eligibility thresholds that function like a light switch: “on” at adjusted gross income of $40,000, “off” at adjusted gross income of $300,000.  Why were these numbers chosen?  Well, they do correspond to the top of the state’s current (temporary) fifth highest and third highest taxable income brackets, respectively, for married-joint returns. But taxable income is not the same as adjusted gross income. In fact, a couple with one child and adjusted gross income of $40,000 will have a taxable income no higher than $24,400.  At the other extreme, a family with adjusted gross income of $300,000 will typically have a taxable income of $280,000 or less, after itemized deductions. And for parents who file as individuals or heads of households, the tax brackets begin and end at different levels, although the new tax credit provision doesn’t seem to recognize it. Were the drafters of this bill confused, or just being arbitrary?

Anyway, let’s say you had two small children and income of $42,000 in 2012. Congratulations: you’ll get a check for $350 in the fall of 2014.  But let’s say that in 2013, you get laid off and your adjusted gross income drops to $39,900.  In that case,  you’re out of luck: no check will be in your mailbox in the fall of 2015.

From any ideological perspective — left, right, or in between — adding new income eligibility cliffs and complexity to the tax code is generally considered the opposite of good tax policy. However, such things are inevitable when you design a “tax cut” with purely political purposes in mind.

- E.J. McMahon is the President at the Empire Center for Public Policy.