New Yorkers face retroactive state tax increases

Following are highlights of changes in the budget.

• Personal income tax. Effective for tax years beginning in 2021, the enacted budget amends Section 601 of the tax law to increase the current top rate from 8.82% to 9.65%. Additionally, it creates two new personal income tax brackets for the highest-income earners in the state: Individuals with income of more than $5 million but less than $25 million will be taxed at a rate of 10.3%, and individuals with more than $25 million of income will be taxed at a rate of 10.9%.

• Corporate franchise tax.
• Tax rate. For tax years beginning on or after Jan. 1, 2021, and before Jan. 1, 2024, the applicable tax rate is increased from 6.5% to 7.25% for corporations with New York income of more than $5 million.
• Capital base tax. The enacted budget delays the phaseout of the capital base until 2024. For tax years beginning on or after Jan. 1, 2021, and before Jan. 1, 2024, the applicable tax on the capital base is 0.1875%. Beginning on or after Jan. 1, 2024, the tax rate on the capital base will be reduced to 0%. However, the 0% rate on the capital base still will be applicable to small-business corporations and cooperative housing corporations.

• Optional pass-through entity tax. Effective on or after Jan. 1, 2021, eligible S corporations and partnerships will be permitted to make an annual election to be taxed at the entity level. The election must be renewed annually by the due date of the first estimated payment under Section 864 of the tax law. Once made, the election is irrevocable for the tax year for which it is made, and only one election may be made during the calendar year. A provision tying a New York S-corporation election to the federal election was not included in the final budget package. Thus, a separate S-corporation election is required for New York purposes.

The federal $10,000 cap on the state and local tax itemized deduction makes these hikes even more painful. New York taxpayers should act now to estimate and mitigate the potential impact of the tax rate increase and optional pass-through entity tax.