Will IRS go for NY's tax reform workaround?

The New York State tax code is changing to provide a workaround to the new federal $10,000 cap on the state and local tax deduction. However, some tax policy analysts are doubtful the IRS will go for it.

Gov. Andrew Cuomo believes that the new federal tax code is an attack against New Yorkers. In response, Cuomo restructured the state tax code as part of next year's state budget.

"They launched the missile. We were standing in the target zone of the missile because of our tax code," Cuomo said. "We had to get done before the missile hit."

The plan also includes preserving federal deductibility by providing new options to make charitable donations at the state and local level. And it creates an option for employers to pay a deductible tax on wages. But the charitable donation part is raising some concern.

"In effect, you write a check to a charitable fund that is created by the state of New York that funds general government operations or funds some sort of governmental purpose and then you receive a credit," said Jared Walczak, a senior policy analyst at The Tax Foundation.

He said that New York State has found a way to avoid the federal tax code by changing the state tax code—and the IRS knows exactly what is going on. The problem is there has to be some genuine charitable element in a charitable contribution to be able to claim, and you have none of those elements in this plan.

"For example, you could have made your contribution to a state fund you get your 85 percent credit back and then the IRS says 'Sorry,'" Walczak said. "And now you've paid more to New York than you would have otherwise and you're getting nothing at the federal level."

The IRS will likely issue guidance to taxpayers stating you cannot re-characterize your New York taxes as a charitable contribution, Walczak said.