NYS Tax Changes – 2009

June 2009 NYS Tax Changes – 2009 Governor Patterson signed into law the fiscal year 2009-2010 Revenue Bill on April 7, 2009, as part of New York's fiscal budget. The legislation increased the individual income tax rate; eliminated the middle-class STAR rebate program; increased the interest rate for late payments and tax assessments; accelerated tax payments for businesses; and increased taxes on beer, wine, cigarettes and cigars. Personal Income Tax Rates - Before the new legislation, the top New York State tax rate for individuals was 6.85%. The new law adds two additional tax rates, 7.85% and 8.97%. The 7.85% applies to income over $200,000 (single taxpayers), $250,000 (head of household filers) and $300,000 (married filing jointly filers). The 8.97% rate applies to taxable income over $500,000 for all taxpayers. The new tax rates are effective retroactively to January 1, 2009. They remain in effect for the 2009, 2010 and 2011 tax years. New York State also has 4%, 4.5%, 5.25% and 5.9% tax rates that apply to lower-income levels, as noted below. NYS Tax Rates for 2009–2011 Tax Rate 4%** 4.5%** 5.25%** 5.9%** 6.85%** 7.85% 8.97% Joint Filers < $16,000 $16,001–$22,000 $22,001–$26,000 $26,001–$40,000 $40,001–$300,000 $300,001–$500,000 >$500,000 Head of Household Filers < $11,000 $11,001–$15,000 $15,001–$17,000 $17,001–$30,000 $30,001–$250,000 $250,001–$500,000 >$500,000 Single Filers* < $8,000 $8,001–$11,000 $11,001–$13,000 $13,001–$20,000 $20,001–$200,000 $200,001–$500,000 >$500,000 *and married filing separately filers ** subject to tax table benefit recapture 12587759.1 -2- Tax Table Benefit Recapture – The two new (higher) tax rates are just part of the story. The new legislation also imposes another supplemental tax, called “tax table benefit recapture.” In essence, this supplemental tax eliminates the benefits of the lower tax brackets for higher-income taxpayers. Thus, the new tax rates are not simply higher marginal tax rates; they are actually higher effective tax rates. Married taxpayers with taxable income over $300,000 (the start of the 7.85% rate) will pay a tax rate of 7.85% on their entire taxable income, with a “phase-in” between $300,000 and $350,000. The comparable taxable income thresholds (for the 7.85% rate) for heads of household and single taxpayers are $250,000 and $200,000, respectively. All taxpayers with taxable income over $500,000 (the start of the 8.97% rate) will pay a tax of 8.97% on their entire taxable income, with a phase-in between $500,000 and $550,000. The phase-in of the tax table benefit recapture is calculated on a pro-rata basis over the $50,000 range. For example, if taxable income is at $325,000 or $525,000 (the middle of the phase in range for the second-highest and highest brackets), then only 50% of the lower bracket “benefit” is eliminated. Itemized Deduction Limitation - For taxpayers with adjusted gross income (AGI) more than $1 million, itemized deductions are eliminated, except for 50% of the charitable contributions allowed for federal purposes. No other itemized deductions can be claimed on a New York return. Previously, for taxpayers at income levels above $475,000, the limitation was 50% of federal itemized deductions. Example Assume a married couple has $1 million of adjusted gross income (AGI) as well as the following federal itemized deductions: Property taxes Mortgage interest expense Charitable contributions Total $50,000 $50,000 $100,000 $200,000 The impact of just $1 of additional income is dramatic, since itemized deductions are significantly reduced for income over $1 million as follows: 12587759.1 -3- AGI (A) 2008 $1,000,000 $200,000 <8,401> $191,559 <95,799> $95,799 $904,201 $61,938 2009 $1,000,000 $200,000 <8,332> $191,668 <95,834> $95,834 $904,166 $81,104 $19,166 2009 $1,000,001 $200,000 <8,332> $191,668 <141,668> $50,000 $950,001 $85,215 $4,111 Gross federal itemized deductions Less federal limitation deductions Net federal itemized deductions NYS limitation NYS itemized deductions (B) NYS taxable income NYS tax Increase (A-B) The change in tax rates between 2008 and 2009 result in $19,166 more in tax (about a 30% increase). In addition, a $1 increase (between $1,000,000 and $1,000,001) of 2009 adjusted gross income results in a tax increase of $4,111 due to the total elimination of itemized deductions (except for 50% of charitable deductions). Estimated Tax Revisions - Although the law is retroactive back to January 1, 2009, there will be no penalty for any shortage in a taxpayer's first quarter estimated tax payment due April 15, 2009 that is attributable to the above changes, as long as any shortage is added to and included in the second quarter estimated tax payment due June 15, 2009. To avoid a penalty for underpayment of estimated tax for 2009, the total amount of estimated tax and withholding tax due on a quarterly basis must be: A. B. 90% of current liability - at least 90% of the amount of income tax due as shown on one's 2009 income tax return; or 100% or 110% of prior year’s liability - 100% of the tax shown on one's 2008 return (110% of that amount if the New York adjusted gross income was more than $150,000), as long as the 2008 return filed was for a full 12 month year. Under the new law, to use the prior year liability exception, one must recompute one’s 2008 tax liability using the 2009 tax rates and itemized deduction rules noted above. Increased Interest Rates for Tax Underpayments – The new law increased the interest rate for late payments and assessments of income tax and estate tax from 6% to 7.5% for the period April 7, 2009 through June 30, 2009. The interest rate increase for the majority of other state taxes, including corporate tax, is increased from 6% to 8%. The interest rate for late payments and assessments of sales and use tax is increased from 14% to 14.5%. 12587759.1 -4- School Property Tax Relief (STAR) Program – The middle-class STAR rebate program is eliminated. This program provided property tax rebates to middle-class New Yorkers. NY Nonresident’s Gain on Sales of Partnership and Other Entities Holding New York Real Estate - The law requires a New York nonresident to report New York source gain on the sale of interests in partnerships and other entities, to the extent that the gain is attributable to the entity’s ownership of New York real property interests, if that property has a fair market value equal to or greater than 50% of all the entity’s assets. Under prior law, the sale of such partnership or other entity interest was generally not considered New York source income to a New York nonresident. Excise Tax Increases - The tax on most tobacco products increased from 37% to 46% of the wholesale price, effective as of April 7, 2009. Beginning May 1, the excise tax on wine is increased from $.19 per gallon to $.30 per gallon; the tax on beer is increased from $.11 to $.14 per gallon. Sales Tax Increases – A number of sales tax increases were enacted, including the special tax on passenger car rentals (5% to 6%) and prepaid sales tax on cigarettes (7% to 8%). In addition, sales of limousines were made subject to sales tax effective June 1, 2009. Filing Fees – Historically, New York has imposed filing fees on limited liability companies and limited partnerships. The filing fees are now expanded to include general partnerships (based on New York source income). New York Residency - Foreign Presence – New York domiciliaries who are present in a foreign country for at least 450 days out of a consecutive 548 days, who are not present in New York for more than 90 days, and whose family (spouse and minor children) did not reside in the taxpayer’s place of abode in New York, are generally treated as New York nonresidents under prior law. The new law modifies the place of abode rule; any presence by a spouse or minor child in New York for more than 90 days during the period is problematic. Thus, if a spouse or minor child violates the 90-day rule, the taxpayer will be considered a New York resident and be taxed on worldwide income. Summary - The cost of living in New York, already high in relation to other states, continues to increase, exacerbated by the above tax changes. When tax changes like the above are enacted, affected taxpayers often think about changing residency to a less taxing state, such as Florida. Although this may be a very appropriate and valid strategy, implementing the strategy without thinking through its implications, and obtaining sound practical advice, is not prudent. New York State has a long-standing 12587759.1 -5- tradition of using efficient and effective audit techniques to locate and assess prior New York residents who attempt to shortcut the rules regarding changing domicile and residency. Questions? The Nixon Peabody Private Clients Group will be pleased to answer any questions you may have. Please do not hesitate to contact us. * * * * * * To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 12587759.1 For additional information or advice, please feel free to call or e-mail your Nixon Peabody advisor the private clients team members listed below. (emailname@nixonpeabody.com) ALBANY, NY 677 Broadway 10th Floor Albany, NY 12207 (518) 427-2650 Fax: (518) 427-2666 BOSTON, MA 100 Summer Street Boston, MA 02110-2131 (617) 345-1000 Fax: (617) 345-1300 BUFFALO, NY Key Towers 40 Fountain Plaza Ste. 500 Buffalo, NY 14202 (716) 853-8100 Fax: (716) 853-8109 CHICAGO, IL 300 S. 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