As tax time rapidly approaches, taxpayers in states with high state and local income taxes (such as New York) are about to learn, up close and personal, just how much the loss of the deduction for state and local taxes (SALT) will affect their personal tax liability.  A little-publicized provision of the New York Tax Law, however, may take away some of the sting of losing the SALT deduction.

Under Section 612(c)-3(a) of the New York Tax Law, taxpayers age 59½ or older may exclude up to $20,000 of qualified pension and annuity income from their Federal adjusted gross income for purposes of determining their New York adjusted gross income.  The full $20,000 exclusion is also available in the year the taxpayer attains age 59½ with respect to pension and annuity income received on or after you became 59½.  And married couples age 59 ½ may each capitalize on the exclusion even if they file a joint return.  As a result, up to $40,000 per year can potentially be excluded from New York State income taxation.  Note that these taxes are not deferred; they will never be paid.

It should be noted that taking advantage of the New York state exclusion would result in some acceleration of Federal income tax since the exclusion only applies to amounts included in the taxpayer’s Federal adjusted gross income.  The benefits of deferring taxation on the investment earnings prior to distribution must also be factored in.  (This may be ameliorated somewhat by using a “Roth” conversion along with the taxable distribution.  Roth accounts are taxed up front, but future investment earnings and distributions are not subject to income tax.)

There are many variables at work here, and everyone’s tax situation is unique.  Even so, the provisions of the New York State Tax Law (and those of several other states, including South Carolina and Colorado) may provide an opportunity to limit the state and local tax bite on your retirement assets.  We suggest that you discuss this with your tax advisor.