New York’s Enacted 2017-2018 Budget Contains Significant Personal Income Tax Provisions

This is Part 1 of a multi-part series on the new New York State Budget. Check out Part 2 and Part 3 and Part 4.

The 2017-2018 Budget (“Budget”) signed by New York Governor Andrew Cuomo on April 10, 2017 contains a number of significant provisions modifying the New York State personal income tax. The following is a summary of the highlights

• Extension of the so-called “millionaire’s tax” for an additional 2 years – The top statutory tax rate of 8.82% is extended for an additional 2 years (taxable years beginning in 2018 and 2019). For unmarried individuals, the top rate applies to income over $1,077,550 in 2018 and 2019. For married individuals filing jointly, the top statutory tax rate applies to income over $2,155,350 in 2018 and 2019. The top rate for those years applies to income over $1,616,450 for heads of households. For taxable years beginning in 2020 and thereafter, the top rate reverts to 6.85% for unmarried individuals with income over $215,400, married individuals filing jointly with income over $323,200 and heads of household with income over $269,300. 
• “Middle class” rate reduction – The current 6.45% and 6.65% tax rates will be gradually reduced beginning in 2018 until the rates reach 5.5% and 6%, respectively, in 2025. For example, in 2016, the 6.45% rate applied to married individuals filing jointly with income over $42,750 but not over $160,500 and 6.65% for income over $160,500 and up to $318,750. In 2018, married individuals filing jointly will be subject to a rate of 6.33% for income over $43,000 but not over $161,550 and 6.57% on income over $161,550 but not over $323,200. In 2025, the applicable rate will be 5.5% for income over $27,900 but not over $161,550 and 6% for income over $161,550 but not over $323,200. Similar reductions in the applicable rate will apply to unmarried individuals and heads of household.
• Itemized deduction limitation – The Budget extends the “50%/25%” limitations on the itemized deduction of charitable contributions for an additional 2 years (taxable years beginning in 2018 and 2019). Under the limitation, individuals with New York state adjusted gross income over $10 million will remain capped at 25% of the federal charitable tax deduction, and individuals with New York state adjusted gross income over $1 million and not more than $10 million will be capped at 50%.
• Partnership transactions under Internal Revenue Code Section 1060 – Another significant provision in the Budget modifies the personal income tax treatment of the sale or transfer of certain partnership interests. In a transaction involving the sale of partnership assets subject to IRC Section 1060, the seller can generally treat the sale as the sale of a partnership interest (generally not subject to New York state tax for nonresidents, except for certain real estate partnerships), while the buyer is eligible for a step-up in basis on the acquired assets.  As revised, any gain recognized federally from the transaction is treated as New York source income as the sale of assets under New York law in the year of sale or transfer.  This takes effect immediately.
• Sale of co-ops – The Budget amends the law to treat gain on the sale of entities that own shares in cooperative housing corporations, where the related cooperative units are in New York, as New York source income for nonresident individuals if the fair market value of the cooperative shares and related cooperative units are 50% or more of the entity’s assets on the date of sale or exchange. This amendment makes the treatment of such cooperative units consistent with the treatment of sales of other entities with real estate (e.g., partnerships/LLCs). This takes effect immediately and applies to taxable years beginning on or after January 1, 2017.