New York State Changes Personal Income Tax Rates

Effective January 1, 2012, New York State will have new personal income tax rates. Whether the rates were increased or decreased depends on how you look at it. Tax rates in 2012 will be lower than they were in 2011, but higher than they would have been if the temporary rates enacted in 2009 had expired without further action.¹

Before the change, New York’s permanent income tax rates reached a maximum rate of 6.85% for individuals with taxable income over $20,000 and married taxpayers with taxable income over $40,000. In 2009, the so-called “millionaire’s tax” as enacted,² which added tax brackets of 7.85% for individuals with taxable income of $200,000 to $500,000 and married couples with taxable income of $300,000 to $500,000, and a maximum tax rate of 8.97% for individuals and married couples with taxable incomes above $500,000.

The “millionaire’s tax” was set to expire at the end of 2011. Governor Andrew Cuomo, elected earlier this year, had made a campaign promise not to extend these temporary upper brackets. However, there was also a recognition that some action was required because of the looming budget deficit of $350 million this year and as much as $3.5 billion next year. Further, without the higher brackets the tax rates reached their maximum rates at relatively low taxable incomes of $20,000 for individuals and $40,000 for married couples.

As a consequence, New York just enacted legislation to provide for additional tax brackets for the years 2012-2014. The new rates for individual and for married taxpayers before and after the rate change are as follows: 

In all cases, the new rates are lower than the rates that existed from 2009-2011. The new rates will be adjusted for inflation. One of Governor Cuomo’s goals was to provide a tax cut to the middle class and greater progressivity to New York tax rates.³ Changes in personal income tax rates have a huge impact on state revenues, because New York State collects over 62% of its revenues from personal income tax.⁴ The new rates are expected to collect $1.9 billion in net additional annual revenue, compared with the approximately $4 billion per year that the previous top rates garnered.

The 8.82% maximum New York State tax rate compares with a top rate of 6.7% in Connecticut and 8.97% in New Jersey. The New York State rate does not include the personal income tax imposed on New York City residents at a rate which tops out at 3.876%, and which was not impacted by the changes in the State income tax rates.

Moreover, the effective State rate is actually higher than it initially appears compared with federal income tax on the same income. This is because of the phase-out of itemized deductions for upper-income taxpayers in New York,⁵ and other quirks of New York income tax law, such as having an add-back for federal bonus depreciation.

Some recent authorities illustrate these provisions and the problems they can cause. A recent court decision confirmed that because of the phase-out of New York itemized deductions, gambling losses cannot be used to offset gambling winnings, even though there is a federal income tax deduction for such losses up to the amount of the gambling income.⁶ As a second example, in a recent advisory opinion,⁷ the New York State Department of Taxation and Finance held that federal bonus depreciation must be added back to New York taxable income, and that passive losses may not be used to shelter this income. The result in both cases is New York State tax where there is no net income and no federal income tax.

These and similar tax problems will not disappear with the rate change, but with the tax rate reduction from 2011 to 2012 they may become a little less painful. 

 ¹This is why the new tax rates have been described as both a rate cut and a revenue-raiser.
²See GT Alert “New York Increases Tax Rates and Penalties and Adds New Taxes and Penalties to Reduce Deficit,” May 2009.
³In a December 5, 2011 essay written to the State’s newspapers, the governor wrote, “The millionaire’s tax purported to shift the tax burden to the super wealthy to alleviate the burden on the middle class. But it failed on both counts. It actually raised taxes on people who were making $200,000 – hardly ‘millionaires.’ And it did absolutely nothing to lower the disproportionately high tax burden on middle class families, who continue to pay the same marginal rate whether they make $40,000 or $299,000 in taxable income.”
⁴ $36.2 billion is collected from personal income tax out of a total of $58.2 billion. New York State Department of Taxation and Finance Office of Tax Policy Analysis, “2010-2011 New York State Tax Collections” reporting for the fiscal year ended March 31, 2011.
⁵ Itemized deductions are reduced for taxpayers with a New York adjusted gross income over $100,000. For taxpayers with a New York adjusted gross income above $1,000,000, no itemized deductions are permitted other than a charitable deduction in the amount of 50% of the federal deduction; for adjusted gross incomes above $10 million, this shrinks to 25%.
⁶ Karlsberg v. Tax Appeals Tribunal, 925 N.Y.S.2d 237 (Third Dep’t, 2011).
⁷ TSB-A-11(6)I (September 22, 2011). An advisory opinion is binding on the Department only with respect to the taxpayer who requested it, but is indicative of the Department’s position on a particular set of facts.