We've now had several people contact us regarding letters they've received from the New York State Department of Taxation and Finance. They are "Statement of Proposed Audit Changes" and were sent because the State believed the subtraction of the LOSAP payments from the payees taxable income was done incorrectly for the 2017 tax year.
In the cases we've specifically reviewed, the LOSAP payment received by the individual is eligible to be subtracted from New York State income, but the individual did not take the subtraction correctly.
On the 2017 IT-201 (the NYS Resident Income Tax Return form), New York subtractions are listed on lines 25 to 31.
Line 26 is where NYS retirement system payments and Federal pensions are to be listed. LOSAP is not either of these and this is not the correct place to take the subtraction.
Line 29 is where a taxpayer is allowed to subtract up to $20,000 of "other pensions and annuities". Prior to 2014, this is actually where a taxpayer would exempt LOSAP payments from NYS income tax pursuant to a ruling from the Tax and Finance department. But that changed with the April 2014 change to the NYS Tax Law; therefore, this is not the appropriate place either.
Line 31 is where "other" subtractions are to be listed, and references form IT-225. If you review form IT-225, you will find that the LOSAP subtraction is subtraction S-130. That is the appropriate place to take the subtraction, which then flows through back to Line 31 on the IT-201.
However - it is important to note there are two stipulations in order to qualify for the subtraction. First the taxpayer must be over age 59 1/2. Second, the payment must not have been paid as a lump sum. The first condition is easy for the State to determine. The second is not. We don't know if the State is making a judgement call on whether-or-not the payment was a lump-sum; to this point that was not cited as a reason for a notice.
In one situation, the tax form that was received did not indicate that the payment was for a LOSAP, and so the State flagged it. We provided a letter for the individual to send to the State, certifying that the payment was, in fact, a LOSAP payment. In this particular case, the payment was being made from an insurance annuity and LOSAP was not indicated on the tax form.
If you received one of these notices, it is possible you will have to file an amended return and properly take the subtraction.
For 2020, the State has not yet released the 2020 IT-201. As of 2019, the lines referenced above did not change - a taxpayer would still use form IT-225 and flow through the subtraction to line 31. Read the 2020 instructions carefully.
Please contact your tax professional with any questions. This article is not tax advice, but informational only.