New York is raising taxes for millionaires. What you need to know
New York Governor Andrew Cuomo speaks at the Rochdale Village Community Center in Queens, New York on April 5, 2021.
Brendan McDermid | AFP | Getty Images
New Yorkers with the highest incomes are on the verge of a tax hike.
The Senate and New York State Assembly passed a budget proposal of $ 212 billion late Wednesday after lawmakers reached an agreement with Democratic Governor Andrew Cuomo.
The move will raise taxes for the wealthiest New Yorkers and corporations to generate more than $ 4 billion in revenue. Legislators will also legalize mobile sports betting, generating additional revenue of $ 99 million this fiscal year and up to $ 500 million a year in the future.
Additionally, the plan provides more relief for those hardest hit by the coronavirus pandemic, such as renters, small businesses and undocumented immigrants.
“If you are in one of these tax brackets, you will be hit,” said Ed Slott, CPA and founder of Ed Slott & Co.
Here’s what you need to know.
More from Invest in You:
How Much Can You Expect From Social Security When You Make $ 40,000?
The scammer “Catch Me If You Can” says this scam is making a comeback
Avoid the fear of tax filing by following the steps below
Top earners and companies receive a tax increase
The plan will increase the income tax rate from 8.82% to 9.65% for individuals who earn more than $ 1 million a year and couples who earn more than $ 2 million a year.
The bill will also create two new tax brackets targeting the highest earners.
Those who earn more than $ 5 million a year will see their personal income tax rate rise to 10.3%, and those who make more than $ 25 million annually will see a tax rate of 10.9% .
The budget would also increase taxes on businesses and increase the business income tax rate from 6.5% to 7.25% for three years through tax year 2023 for those with business incomes greater than $ 5 million under the plan.
Coupled with the personal income tax increases, the increased taxes are estimated at approximately $ 4.3 billion annually.
Taxes in New York City will be the highest in the United States. Will other states follow suit?
Millionaires in New York City will soon face the highest personal income taxes in the country.
The state tax rate combined with city taxes would range between 13.5% and 14.8%, surpassing California, which currently holds the title with a 13.3% levy on taxpayers who, according to the Tax Foundation, more than 1 Earn a million dollars.
“It’s important to remember that millionaire taxes are nothing new. There are several states that have proposed these taxes,” said Jessica Perna, private tax partner at Ernst & Young. She added that many states are trying to increase their revenues after being badly hit during the pandemic.
Last year, New Jersey passed its own millionaire tax, raising the income tax rate for those who earn at least $ 1 million. Legislators in a number of other states, including California, Massachusetts, and Maryland, have considered levying taxes on millionaires.
The tax increases may not be permanent
The way the plan is written means the tax increases are expected to be applied retrospectively from the start of the year.
According to Perna, those affected by the tax hike may now want to take certain steps.
If you find yourself in a bracket who would see a bump at the start of the year and receive a bonus, or made a major transaction, make sure you paid enough tax. At the end of the year, you could face a tax burden with penalties and interest if you underpaid your liability.
The tax increases are currently expected to end in 2027. However, experts are cautious.
“I would be suspicious,” said Mark Steber, Jackson Hewitt’s chief tax information officer. “Temporary things can become permanent.”
What about salt deductions?
On Wednesday, Cuomo said he expected the tax hikes in his plan to be offset by a lift in the federal cap on state and local tax deductions.
If the so-called SALT cap, which is currently set at $ 10,000, is lifted, it means net taxes will be 37% lower, according to Cuomo.
“After SALT, taxes will be lower than before,” Cuomo said during a briefing Wednesday, adding that he had spoken to lawmaker and President Joe Biden about the matter. “But you have to keep SALT, what you promised.”
However, it is not clear whether the SALT cap will be lifted. A group of Democratic governors, including Cuomo, recently wrote to Biden calling for a rollback of the Trump-era ceiling, which House spokeswoman Nancy Pelosi also supported. In January Senate Majority Leader Chuck Schumer, DN.Y., along with Sen. Kirsten Gillibrand, DN.Y., introduced legislation that would eliminate this.
Temporary things can become permanent
Chief Tax Information Officer, Jackson Hewitt
Still, removing the cap would cost money that Democrats would have to find. If the cap had been lifted for 2020 and 2021, it would have cost $ 48.9 billion and $ 88.7 billion, respectively, according to the impartial Joint Tax Committee.
In addition, according to Slott, many people would not benefit from lifting the SALT cap.
“Picking it up sounds good to higher-income New Yorkers, but it doesn’t do anything to most people,” he said.
The top 20% of earners would get more than 96% of the benefits of a SALT waiver, and the top 1% of all earners would get 57% of the benefits, according to the Tax Policy Center.
Will high earners move?
When tax increases occur, especially at the state level, those affected may wonder if they should move to a state with a lower tax liability.
With so many working remotely due to the pandemic, it’s possible some permanent moves could be taken in states with lower taxes.
“Are you really in such a hurry to accept a 15% tax that you can avoid by rearranging your affairs?” Edward Renn, a partner at Withers law firm, said many high income earners are likely to at least consider moving or working remotely to avoid the hike.
However, for tax reasons, other considerations need to be made before moving, even though individuals affected by this increase will have more resources than most to help them move.
“I think if people move often for tax reasons, it’s not a good idea,” said Slott.
Renn agreed. “I always advise customers not to let the tax tail wag their dog,” he said. “Go where you are happy.”
REGISTRATION: Money 101 is an 8-week financial freedom learning course delivered to your inbox weekly.
CHECK OUT: How to make money doing creative side businesses, from people who make over thousands on sites like Etsy and Twitch Grow with acorns + CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.