Hamill: New Mexico taxpayers face key 2025 changes

I have reviewed many of the new federal income tax changes for 2025. New Mexico also has a few new wrinkles.

Much of what is discussed below is not new. But I have had various questions regarding these items, so they are also discussed.

First, there is a new tax bracket, and the overall rate structure will generally be favorable for taxpayers.

New Mexico once allowed a medical expense deduction for all taxpayers who were unable to receive a benefit on their federal tax return.

The “old” medical deduction was a sliding percentage of the costs incurred, with a decreased deduction as your income rose.

Now the medical expense deduction is available only for those age 65 or older with substantial unreimbursed expenses.

If the medical deductions are at least $28,000, you may claim a $3,000 exemption on the state tax return.

Social Security income may be completely tax-free in New Mexico if your federal adjusted gross income (AGI) does not exceed a threshold.

Lower-income taxpayers also avoid tax on Social Security for the federal tax return, and those people have no adjustment to make on the state return.

Others will include 50% or 85% of their Social Security receipts as income on the federal return. Those people benefit from the state adjustment.

The New Mexico Social Security deduction is all or nothing. If income exceeds the threshold, no deduction is allowed; otherwise, a 100% deduction applies.

The threshold for a single taxpayer is an AGI of $100,000. For married taxpayers filing a joint return, it is $150,000.

So, for example, a single taxpayer with $20,000 of taxable Social Security included in the federal AGI of $99,500 will exclude all Social Security on the state return.

If that same single taxpayer had AGI of $101,000, no deduction would be allowed. This creates a “cliff” for the deduction rather than a “phase out.”

New Mexico also continues to provide a special deduction for net capital gains reported on the federal tax return.

The deduction is 100% of all net capital gains up to $2,500. It is otherwise 40% of the gains, limited to $1 million of total gains.

A “net capital gain” is reported as a long-term capital gain on the federal tax return. It does not include short-term capital gains.

It also includes what is known as “Section 1231 gains,” which are derived from real property or depreciable property used in a business.

The key issue with determining the availability of this deduction is whether the net capital gain was sourced in New Mexico.

Business or farm income is “apportioned” among New Mexico and any other states based on a formula.

This formula uses the property, payroll, and sales of the business within each state. There is no need to apportion if all the activity is within New Mexico.

Nonbusiness income is “allocated” among New Mexico and any other states by assigning the income to the state where it was earned.

The New Mexico net capital gains deduction is limited to income that is either apportioned or allocated to New Mexico in the year the gain is reported.

The New Mexico PIT-B requires reporting of the apportionment and allocation of income that is not all attributable to New Mexico.

This means that the taxpayer will already have the information needed to determine if the net capital gains deduction is available.

The state also allows licensed public school teachers to claim a deduction of up to $1,000 for out-of-pocket school supplies purchased for the classroom.

School supplies do not include things like a computer purchased for use in the classroom.

One of the issues with the new federal tax bill enacted last July is whether the various states will recognize certain new tax deductions.

New Mexico tax reporting begins with federal AGI. This means that any deductions that are included in AGI are also allowed for state.

This includes items like tip income, overtime income, the senior deduction and the deduction for car loan interest.

Each of those deductions is subject to limits that I discussed in a previous column. If the federal deduction is unavailable, it is also lost for state reporting.

Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.