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there was much gnashing of teeth when Congress passed a tax bill that removed the state tax deduction for individuals. It was perceived as a slight at so-called blue state residents, making many of us the smurfs of the nation.

In any event, not to be outdone, a number of blue states (I'm looking at you, New York) passed legislation to circumvent the loss of the deduction. The work-around was for the state to enact a "Pass Through Entity Tax" (PTET for short). The gist of it was if you were a partner or an S corporation shareholder, the entity you worked for could pay the tax at the entity level partnerships and S corporations are not taxed as stand alone entities, like corporations). If the entity paid the tax, that reduced the profit of the entity that was distributed to you at the end of the year. In other words, the state tax deduction, which is a legitimate deduction for businesses (but not individuals due to the law change noted at the outset), gets passed to you through the back door, by reducing your taxable income, the same way it used to when you could claim the deduction outright.

States like NY beat their collective chests at how much they were doing to foil the IRS and help their own citizens. EXCEPT--NY will not pay interest if you have a refund due to the PTET. O--kay. So where's the problem? New York by law must pay interest on refunds you're entitled to when you filed your tax return, if the state doesn't pay the refund within 45 days of you filing the return. In cases of PTET refunds, the state has been holding YOUR money over six months (last time I checked that was way more than 45 days), because it doesn't have to pay interest. So the state has an interest free loan from taxpayers, based on what they trumpeted as a pro-taxpayer provision. Another case of government man speaking with forked tongue.


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