ALBANY — Your Social Security payments may go down a bit, but you may also receive less upon retirement if a complex plan to deal with federal tax changes goes through in New York.
Gov. Andrew Cuomo’s plan to offset the loss of federal tax deductions is still being finalized and is scheduled to be presented to lawmakers in the coming weeks.
By swapping employee-paid state income tax for a payroll tax funded by employers, the governor and his budget planners hope to circumvent the new $10,000 cap on federal deductibility of state and local taxes, including state income taxes.
The plan is complicated and has a lot of moving parts. And the latest twist may involve the impact of such a swap on the Social Security taxes that wage earners pay during their working years and collect in retirement.
It’s one of many factors to consider in such a tax swap and it shows how difficult that carrying out the plan may be.
Cuomo has repeatedly said that capping state and local tax deductions, known as SALT, would hurt the state budget. That’s because residents of areas with high local taxes such as Westchester, New York City and Long Island have long used deductions to offset those taxes. But the new cap on deductibility amounts to a substantial de facto tax increase for those downstate residents.
If wage earners had no state income taxes, that could go a long way to countering the loss of SALT. But to do that, employers would likely reduce their employees’ overall gross pay to fund their own higher payroll tax.
With lower gross pay, wage earners could also realize modest savings since they would pay lower proportionate Social Security taxes which are separate from federal income taxes.
But they would also collect less upon retirement.
“It’s going to hurt them a little bit when they start collecting,” said Charles Capetanakis, a CPA and tax attorney at Davidoff Hutcher & Citron.
A person earning the state median household income of $56,000, pays 6.62 percent in Social Security taxes, or $3,472. If gross earnings go down due to a swap, that could drop. While a welcome savings now, the individual could get less in their monthly Social Security check.
The precise amounts are subject to numerous variables and may not be life-changing for an individual.
Still, lots of people depend heavily on Social Security in their retirement years, Capetanakis noted.
Moreover, if one were to multiply it by millions of taxpayers, New York would be contributing less to the federal Social Security system. That, in turn, could invite scrutiny from Congress.
“In aggregate this is a much bigger concern and it just adds to the litany of policy questions that the Cuomo administration hasn’t answered,” said Nicole Kaeding, director of special projects at the Tax Foundation, a Washington, D.C., organization that studies tax policies nationwide.
The Foundation has expressed doubts about the feasibility of Cuomo’s payroll/income tax swap due to its complexity.
Another wrinkle lies with New York’s vast public sector. A lower gross income to be offset by income tax changes could impact pensions. Public pensions in New York are based upon one’s wages and the number of years worked. Because the public sector is unionized, any decrease in gross pay would have to be collectively bargained.
“To the extent that employers would decrease (gross) wages all of those side effects would occur,” Kaeding said.
State budget and tax planners are aware of the issue and acknowledged it in their preliminary report from the Division of Taxation and Finance.
They acknowledge that it’s “also important to note that any reduction in gross income could also affect eligibility for a number of governmental and non-governmental benefits and income-based calculations. These include pension benefits, Social Security benefits, and alimony and child support payments.”
The alimony part is notable, given that the recent Trump/GOP tax overhaul as of 2019 removes the deductibility of those payments for many people, said Barbara King, a matrimonial lawyer with the Tully Rinckey law firm.
“The spouse paying alimony will be unable to claim a deduction that could save thousands of dollars, and the spouse receiving alimony may receive less money as a result,” King said, adding that will likely complicate divorce settlements.