Will Recent New York State Tax Changes Drive High Income Residents From the State?

New York has seen a record number of residents leave over the last few years, which has been spurred in part by both the 2017 Tax Cuts and Jobs Act (TCJA) and the impact of the pandemic on the Big Apple. Some New York City residents who can work from home have decided to head to areas that provide larger square footage for less; while others have chosen to live in cities that offer better weather. Many others have migrated to states with low or no state income taxes, hoping to get more bang for their buck. The pandemic has proven to be a tough time for New Yorkers, with many now asking, what does the future hold for New York post-pandemic?

After the passing of the 2017 Tax Cuts and Jobs Act (TCJA), New York saw high-income earners leaving the state due to the SALT (state and local tax) limitation. In 2021, the New York State legislature began working on a budget bill that was passed in April. This bill features many changes at both the individual and entity levels. Unfortunately, there is another setback for New Yorkers; New York City is now the highest-taxed jurisdiction in the country for the 2021 tax year for high income earners.

The impact of these budgetary changes will not be felt equally across all taxpayers, as the bill will continue to lower income taxes for middle class earners. The breakdown of tax rates are as follows:

• If you earn between $43,000 and $161,550, your tax rate will decrease from 6.09% to 5.97%
• For those earning between $161,550 and $323,200, your rates will go from 6.41% to 6.33%.

Additionally, if you earn less than $250,000 and your property tax exceeds 6% of your gross income, tax credits between $250 and $350 are now available.

In response to the SALT limitation, effective for tax years beginning on or after January 1, 2021, New York has created a Pass-Through Entity Tax (PTE), similar to what some other states have already done. For eligible partnerships and S corporations, an annual irrevocable election by the entity can be made. By electing into the PTE, the entity itself would be subject to pay tax on income earned. These tax rates range from 6.85% for taxable income less than $2 million and increase to 10.9% for taxable income over $25 million. The individual partners or shareholders would be entitled to a credit on their personal income tax returns based on their share of the PTE paid by the entity. The PTE would be a deduction when arriving at the entity’s taxable income and therefore, indirectly, the partner or shareholder is receiving a tax deduction for their share of the income tax paid to New York by the entity.

Corporations in New York State with taxable income under $5 million will have no change in their current 6.5% franchise tax rate. However, corporations over the $5 million taxable income mark will see tax rates increase from 6.5% to 7.25%, through 2023.

It is the high-income earners in NYS who are really taking a hit. For single filers with income over $1.07 million or joint filers with income over $2.15 million, the tax rate increases from 8.82% to 9.65%. If you earn over $5 million, your tax rate is now going up to 10.3%. And if you are a NYC resident making over $1 million, your combined city and state tax will now be between 13.5% and 14.8%.

For those New Yorkers who are investing in Opportunity Zones, they will no longer be able to defer the tax on their capital gain, as New York has decoupled from this Federal incentive.

The new budget bill includes many new provisions that may impact decisions for New York residents to stay in the state or migrate to states with minimal taxes and lower living expenses. Will these new tax law changes encourage people to leave New York State or New York City? Will people who temporarily relocated during the pandemic because they were able to work remotely decide to stay in their new location? These are questions on everyone’s minds.

We will continue to monitor the changes and any additional details issued. If you have any questions about how the new budget may impact you, please contact Rebecca Long, Senior Manager in Anchin’s Real Estate Group, or your Anchin Relationship Partner.