With the signing of New York State’s 2021-22 budget by Governor Cuomo on April 19, 2021, wealthy New York residents are now set to pay more in combined local income taxes than residents of any other state in the nation. Under the new budget, New York-based corporations can also expect to experience a jump in their tax rates this year. Taken together, the state stands to reap an anticipated $4.3 billion in revenue, annually, from these personal and corporate income tax raising measures.
Here are some of the most impactful personal and corporate income tax highlights included in the new budget.
New Tax Brackets for New York’s Millionaires
The 2021-22 New York budget aims to capitalize upon the fact that, more than half of the state’s income taxes are generated from income tax payments made by the top 5% of New York’s highest earners.
- State Income Tax Increases for Millionaires – The 2021-22 New York budget raises personal income tax rates for both single filers with annual income in excess of $1,077,050 and joint filers with income exceeding $2,155,350 from 8.82% to 9.65%.
- Two New but Temporary Tax Brackets – Income tax brackets are also temporarily being expanded under New York’s 2021 budget to include two new brackets – those with annual income over $5 million and those with income over $25 million. A 10.3% tax would be imposed on those earning over $5 million and a 10.9% tax would be levied on those earning over $25 million, though these rates are set to expire before the end of 2027.
- New York City Residents to Have Highest U.S. Combined Tax Rate – New York City’s highest income tax is 3.88%. Therefore, when factoring state and local taxes into the equation, millionaire residents of New York City can anticipate a total income tax rate of between 13.5% and 14.8%.
A Tax Rate Increase for Corporate Franchises
For those corporate franchise businesses that pull in over $5 million in business income a year, taxes would increase from 6.5% to 7.25%. However, this tax hike would only be in effect through 2023.
Enactment of an Elective Pass-Through Entity Tax
Effective for 2021, partnership entities will now have the ability to opt in for New York State passthrough entity tax by electing to do so on an annual basis. For credit purposes, the tax is specifically allocated to partners based on their share of the pass-through entity tax.
The tax applies to New York source income of nonresident partners and all income allocable to resident partners. Any partnership that has a filing requirement, either because of New York source income or because the partnership includes a New York resident partner, can elect in.
Additionally, the partnership entity taxation enacted through the New York State 2021-22 budget also:
- Imposes the elective tax at graduated rates starting at 6.85% for up to $2 million, 9.65% for $2-5 million, 10.3% for $5-25 million, and 10.9% for more than $25 million, to keep in step with the New York State tax rate increases also set in motion by the 2021-22 budget;
- Provides a credit against income tax allowed to a “direct partner” or “direct shareholder”;
- Prohibits electing passthrough entities to file amended returns without first securing permission;
- Will allow credit for “substantially similar” taxes imposed by other states (Note: This is only allowed for S Corps if the entity is an S Corp for New York purposes); and
- Requires that estimated entity level tax payments be made beginning in 2022. No estimated payments are required to be remitted by the passthrough entity for 2021.
For more information about how the New York State 2021-22 budget may impact your tax situation, please reach out to your Untracht Early advisor.