NYS IT-205 Update

As discussed in our May 14, 2019 post, New York State retroactively changed certain income tax rules for trusts and estates as of January 1, 2018.

For taxable years beginning after December 31, 2017, Form IT-205, Fiduciary Income Tax Return, permits a subtraction adjustment/deduction for taxes (other than state and local sales and income taxes) that exceed the $10,000 limitation on federal Form 1041.  In addition, there will now be a subtraction adjustment/deduction for the miscellaneous itemized deductions that are no longer deductible on federal Form 1041 (e.g., investment advisory and management fees).

The revised instructions indicate that the new subtraction adjustment for taxes (other than state and local sales and income taxes) that exceed the $10,000 limitation that can now be deducted on the New York return should be listed as adjustment “S-138” on Form IT-225, New York State Modifications, which is attached to the IT-205.

Also, those revised instructions indicate that the new subtraction adjustment for miscellaneous itemized deductions that exceed 2% of the adjusted gross income of the trust or estate that can now be deducted on the New York return should be listed as adjustment “S-139” on Form IT-225.

Some tax software packages have not yet been updated to reflect this retroactive change.

As a result, practitioners preparing 2018 returns for affected estates and trusts that are on extension should delay the finalizing of such returns until their tax preparation software has been updated to reflect the new rules.  Hopefully, such updates will be available prior to the due dates for such extended returns, which is September 16, 2019 for calendar-year 2018 returns.

As discussed in our earlier post, for returns that were already filed for the 2018 tax year before this change was enacted, practitioners will need to assess the effect of the change on each such return to see if amending the return is cost beneficial.