In early April, the heads of state and government of the state of New York reached an agreement on the budget of the state for the fiscal year 2022 (Budget Act), which introduces significant changes to the New York tax law. Most of these changes will affect individual taxpayers and trusts, and not impose new taxes on corporations.1 Most important – and nine months after Governor Andrew Cuomo urged New Yorkers to return – are the increases in income tax rates through the Budget Act, which is going to be some See New York residents paying the highest income tax rates in the nation
Individual tax rate increases and tax brackets
The Budget Act increases the income tax rate from 8.82% to 9.65% for individuals reporting taxable income greater than US $ 1.1 million and those reporting jointly taxable income greater than US $ 2.15 million .3
According to the budget law, two new tax brackets are to come into force. For taxpayers reporting taxable income greater than $ 5 million, the tax rate is 10.3%. Taxpayers reporting taxable income in excess of $ 25 million will be subject to the new maximum marginal tax rate of 10.9%. The rate increases sunset in 2027.
In addition to these tax rate hikes, New York taxpayers must grapple with the city’s maximum rate of 3.876%. Individual New York City residents reporting taxable income greater than $ 1.1 million and those filing joint tax returns reporting taxable income greater than $ 2.15 million will have one combined income tax rate of 13.526%. New York City taxpayers reporting taxable income greater than $ 5 million have a combined income tax rate of 14.176%. Taxpayers reporting taxable income in excess of $ 25 million will be subject to a combined tax rate of 14.776%.
Change of residence for a person
New Yorkers looking to change their place of residence / residence should be familiar with the two tests used by the New York Department of Taxation and Finance (DTF) to determine an individual’s place of residence: (1) the residence test and (2) the legal residence test .
In the domicile test, the DTF takes five subjective factors into account:
- Home – Weighing the individual’s use and maintenance of a New York residence versus the use and maintenance of an out-of-state residence (whether owned, rented, or otherwise);
- Active Business Involvement – Investigating where the individual has been employed and earned income, whether he made or led business decisions for a New York based company;
- Time spent – where the person spent most of their time;
- Heart / Emotional Items – where the person will have keepsakes, furniture, pets, etc .; and
- Family Connections – This is where the person’s immediate family (spouse and minor children) was located.
As part of the legal residency test, which, as the name suggests, is based on the law rather than subjective assessment, a person may be considered legal resident of New York if they are not state resident but are more than 183 Days (in the US) Aggregate spends in New York and maintains a “permanent abode”. 4th
Application to New York Trusts
The Budget Act tax increases also apply to certain trusts established by a New York based trust if the trust is a “resident trust”. 5
In general, there are two types of trust for income tax purposes: “grantor” trusts and “non-grantor” trusts.
A Grantor Trust is a trust in which the founder of the trust (the “Grantor”) (or any other person) retains control of, or an interest in, the Trust to such an extent that the Grantor (or such other person) treated as the owner of all or part of the trust for federal income tax purposes. Certain powers in the trust instrument can trigger the trustor trust status set out in accordance with the provisions of the Internal Revenue Code (IRC) sections 671-679 and the relevant regulations. For example, a trust is treated as a grantor trust if someone associated with the grantor (e.g., an associated trustee) retains the right to distribute the trust’s income among the trust beneficiaries.
If a trust is a grantor trust, the grantor will be taxed directly on the income and other tax attributes of the trust on the grantor’s individual income tax return in the grantor’s country of residence. Accordingly, a grantor trust for a resident of New York is subject to New York State income tax.
A trust that does not qualify as a grantor trust is a non-grantor trust. Generally, a non-grantor trust pays trust-level income tax on taxable income withheld by the trust. New York treats a trust as a grantor trust or a non-grantor trust based on how such trust is classified for federal income tax purposes
A non-grantor trust established by a New York resident is considered a “resident trust” and is subject to New York State income tax on all income if it exhibits any of the following characteristics: 7
- A trustee based in New York;
- Real or tangible trust in New York; or
- Any income or profits derived from or connected to sources in New York. 8
A non-grantor trust formed by a New York based corporation that does not have any of the above characteristics is a “Resident Exempt Trust” and is not subject to New York State income tax on its trust income.9 In other words, a Non -Grantor Trust, formed by a New York-based corporation with only non-New York-based trustees, assets and withholding income, is a Resident Exempt Trust and avoids New York State income tax.
New York Resident Trust Considerations
New Yorkers with trusts that are considered resident trusts should consider moving those trusts to a state that generally does not tax trust income by converting the trustees of those trusts to residents of that other state.
In addition, for trusts with New York Situs assets or withholding income, steps may be taken to change the character of the New York Situs property and / or split the trust so that the New York Situs assets or withholding income are divided into a separate subtrust become . The separate subtrust would still be a resident trust, while the main trust, which would have run out of New York Situs assets or sources of income, would be moved to another state.
1. The Budget Act provides a temporary increase in the corporate tax rate from 6.5% to 7.25% by 2023 for companies with business incomes greater than $ 5 million.
2. The highest marginal rate was 13.3% in California.
3. The 8.82% was New York’s highest marginal tax rate since it came into effect in 2009 as a temporary increase to the previous high of 6.85%. The 8.82% tax bracket has been extended to 2025 for individual taxpayers earning less than $ 1 million or joint applicants earning less than $ 2 million. The rate will also be increased from 8.82% to 9.65% for heads of household reporting taxable income in excess of $ 1.6 million.
4. NY Tax Act Section 605 (b) (1) (B). Permanent residence is defined as “a permanent residence maintained by the taxpayer, whether or not he owns it, and generally includes a place of residence owned or leased by his spouse”. 20 NYCRR § 105.20 (e).
5. Budget Act, p. 2509-C, Part A, Section 3; NY Tax Act Section 601 (c) (1) (. B) (iv).
6. NY Tax Act Section 611 (a) and Section 612 (a).
7. Instructions through 2020 NY Form IT-205 at 2.
8. NY Tax Act Section 605 (b) (3) (D) (i); 20 NYCRR § 105.23 (c).
9. NY Tax Act Section 605 (b) (3) (D) (i); Instructions through 2020 NY Form IT-205 at 2.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.