New York Tax Rates Are on the Rise (Again)

New York’s budget package, Chapter 57, signed April 7, 2009, included several tax law and rate changes.

In particular, the state increased the personal income tax rate on high income individuals and limited the Empire Zone program.

Personal Income Tax

For tax years 2009, 2010, and 2011, a new rate of 7.85 percent will apply to single taxpayers who are not heads of household with adjusted gross income (AGI) between $200,000 and $500,000; $250,000 to $500,000 for single heads of household; and $300,000 to $500,000 for married couples filing a joint return. For taxpayers with AGI above $500,000, a tax rate of 8.97% will be imposed. Previously the top rate was 6.85%. New York State or City taxpayers with AGI of over $1 million must now use the standard deduction rather than claim itemized deductions. However, charitable contributions and college tuition may still be deducted. Further, nonresidents must include any gain from the sale of their interest in a partnership or other entity as New York source income to the extent it is attributable to the entity’s ownership of real property in New York. As these provisions are retroactive to January 1, 2009, taxpayers need to consider the impact to their 2009 estimated tax payments. Please consult your tax advisor as you may need to remit additional tax if your first quarter estimated tax payments were based on the “old” law. Also, if your 2009 estimated tax payments were calculated using your 2008 tax liability as a “safe-basis,” you will need to recalculate your 2008 liability using the changes set-forth above.

Reformation of Empire Zone Program

The Empire Zone designation will sunset one year earlier on June 30, 2010. If a business is already certified in a zone prior to this date, the sunset does not impact the firm’s benefit period. As one of the criteria for a business to become certified for Empire Zone benefits, a new lower 10:1 cost benefit ratio (investment to state benefits) must be met by manufacturers. For businesses other than manufacturers, a 20:1 cost benefit ratio that was formerly set forth only in the regulations. The state continues to retain discretion to grant certification to businesses that do not meet the cost benefit ratios.

Zone benefits have also been cut back. Businesses certified in a zone after April 1, 2009 will only be allowed to take 75 percent of the real property tax credit. Also the state will no longer waive its portion of the sales tax for sales made within a zone if the county has not also waived its portion.

The new law eliminates a provision that grandfathered in zone benefits to companies that “shirt changed” prior to August 1, 2002. These “shirt-changers” and firms producing less than $1 in actual investment and wages for every $1 in state tax incentives will now be dropped from the program. If a firm does not meet the $1 to $1 test (calculated over 3 years), it will lose its tax year 2008 benefits. A company “shirt-changed” if prior to August 1, 2002 it caused individuals to transfer from existing employment with another business enterprise with similar ownership and located in New York State to similar employment with the certified business enterprise or if the enterprise acquired, purchased, leased, or had transferred to it real property previously owned by an entity with similar ownership, regardless of form of incorporation or organization. Previously, taxpayers that were certified prior to August 1, 2002 were not subject to the more stringent definition of “new business” incorporated into N.Y. Tax Law Sec. 14(j)(4)(B) in 2002.