A preview of upcoming state tax law changes

Iknow most of you are thinking about the 2023 tax return deadline. Well, OK, I hope you’re actually thinking about other things.

But this is a tax column. It’s a bit late to do anything for last year, so let’s talk about what is coming.

Federal changes are pretty simple to discuss. We don’t know. We should know. We have a House-passed bill that is going nowhere. We have a 2017 law expiring in 2025.

But we do know a few things about New Mexico. The state will now allow a tax credit for the purchase of a new or used electric or hybrid vehicle.

That credit is available now through 2029 and it can range from $2,000 to $3,000 depending on the vehicle.

The buyer must apply for certification for the credit within one year of purchase. The credit cannot be claimed without certification.

The lowest state tax bracket is dropping from 1.7% to 1.5%. The top bracket remains at 5.9%, but a new 4.3% bracket lowers the total liability even for highincome taxpayers.

A potential substantial change for higher income taxpayers is the deduction for net capital gains. Current law allows the greater of $1,000 or 40% of the gain to be deducted.

The new law increases the minimum deduction to $2,500. But the 40% deduction is allowed only for net capital gains from the sale of a New Mexico business.

The 40% deduction is also limited to $1 million of gains from the sale of a New Mexico business.

A net capital gain is a longterm capital gain or a net Section 1231 gain. Section 1231 gains are from the sale of business property.

Short-term capital gains do not qualify under current or new law. Section 1231 gains apply only to assets held more than one year, so there is no short/ long distinction.

Let’s say that someone had $80,000 of net capital gains from a brokerage account.

Under old law, the deduction would be $32,000.

New law would lower that deduction to $2,500 because the brokerage account sales would not be traceable to a New Mexico business.

However, if someone’s brokerage account showed a net capital gain of $1,300, old law would allow a $1,000 deduction. The new law allows the full $1,300.

Both the rate changes and the net capital gain deduction changes are not effective until 2025.

Those with a large unrealized gain might consider recognizing the gain in 2024 to take full advantage of the 40% deduction.

It wouldn’t make sense to accelerate the gain recognition if there was no plan to sell shortly after 2024 anyway.

Even for the highest bracket taxpayer the deduction is worth no more than 2.36% (40% of 5.9%) of the gain.

This benefit is further reduced if the taxpayer can get a federal deduction for the state tax paid.

For this reason, I would never advise someone to sell a stock at a gain in 2024 and buy it back just to get the larger New Mexico deduction in 2024.

However, if someone told me he planned to sell in 2025 anyway, it might make sense to at least consider pushing the gain forward to the 2024 tax year.

Federal law allows teachers a $300 deduction for supplies purchased for classroom use. Beginning in 2024, New Mexico will allow a similar deduction.

The New Mexico deduction applies only to public school teachers, but it can be as much as $500 in 2024 and $1,000 in 2025 through 2028.

Of course, with a lower tax rate the state benefit would be lower than federal. A $500 cost in 2024 saves only $24 for a New Mexico teacher in a 4.7% state bracket.

That’s a small benefit. But as a father of two public school teachers who always hear public criticism of their profession, this works as “it’s the thought that counts.”

There are other provisions in the new law that mirror the federal tax benefits to encourage energy efficiency.

There is also a credit for “angel” investment in New Mexico-based business. There is an annual cap on the state cost. Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.