New York State Budget Tax Changes 2017/2018

New York Governor Andrew Cuomo signed the 2017-2018 budget bill on April 10, 2017. While the budget is a comprehensive plan for spending, it amends and enacts laws and regulations covering a wide range of legislative and tax initiatives. This year’s budget does not make comprehensive changes in either individual or corporate tax, but there are certain provisions which will affect many taxpayers in the coming years.

Personal Income Tax

Rate Reduction

The budget provides for a gradual reduction in marginal personal income tax rates beginning in 2018. In 2018, the 6.45% rate will be reduced by 0.12%. The rate will continue to go down by 0.12% each year until it reaches 5.5% in 2025. Similarly, beginning in 2018, the 6.65% rate is reduced by .08%. Each later year, it will be reduced by .08% until it reaches 6% in 2025. While any rate reduction is welcome, these rate reductions continue for many years out. If future budgets require revenue enhancement, these rate reductions could be placed on hold for one or more years.

Millionaire’s Tax

The top tax bracket of 8.82% for unmarried taxpayers with income over $1,000,000 and for married persons and surviving spouses with income over $2,000,000 is continued through tax years 2018 and 2019. This “Millionaire’s Tax” is also extended for taxpayers filing as head of household with income over $1,500,000.

Charitable Contribution Limitation

The charitable contribution deduction for taxpayers with adjusted gross income exceeding $1,000,000 remains subject to a 50% reduction through the end of 2019. Taxpayers whose adjusted gross income exceeds $10,000,000 remain limited to a 25% deduction.

Non-Resident Partners

A loophole, whereby non-resident partners could avoid New York State taxation on sales of partnership interests, as to which IRC Section 1060 applies, has been curtailed. The legislation now requires gain recognition on the sale of partners’ membership interests, subject to the normal allocation provisions.

Union Dues

The law now permits a deduction for the full amount of union dues paid during a tax year, in the event the taxpayer is not permitted to take a Federal miscellaneous itemized deduction. This provision becomes effective January 1, 2018.

Sales and Use Tax

New rules provide that sales tax may apply in transactions between related entities as such may indeed be retail sales. This includes a sale to a single member LLC, or subsidiaries that are otherwise disregarded for Federal tax purposes. This would also apply in cases where there is a sale to a partnership for resale to one or more partners, or sales to a trustee for resale to a trust beneficiary.

Tax Credits and Property Tax

Numerous reforms and changes have been made to the property tax and general tax credit provisions. The property tax adjustments are specific to certain taxpayers and are not generally of widespread impact. There are, however, numerous changes in the tax credit area:

• A new Life Science Research and Development Credit is created.
• The Empire State Film and Post Production Tax Credit is extended from 2019 to 2022.
• A new Empire State Apprenticeship Tax Credit is effective beginning on or after January 1, 2018.
• The Alternative Fuel and Electric Vehicle Recharging Property Credit is extended from 2018 to 2022.
• A new credit for farm donations to food pantries is created.
• A comprehensive rule is enacted to grant credits to eligible entity owners where credits may have been previously “locked” pass-through entities.

The budget bill is quite lengthy, adding new layers of complexity to various personal and business activities in New York State. However, it is the rate reductions and charitable limitations, along with the extension of the Millionaire’s Tax, that are generally most impactful when we do tax planning and projections.

As the new provisions of the New York State budget are memorialized into tax law, and applicable regulations issued, your Marcum tax professional will keep you advised of important developments and strategies to help navigate these new changes.