The highest-earning New Yorkers are about to be hit with a tax hike.
The New York state Senate and Assembly late Wednesday passed a $212 billion budget proposal after lawmakers reached a deal with Democratic Gov. Andrew Cuomo.
The measure raises taxes on the wealthiest New Yorkers and corporations to generate more than $4 billion in revenue. It also legalizes mobile sports betting, adding another $99 million in revenue for this fiscal year and up to $500 million annually going forward, according to lawmakers.
In addition, the plan includes more relief for those hit hardest by the coronavirus pandemic, such as renters, small businesses and undocumented immigrants.
“If you’re in one of those tax brackets, you’re going to get 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 to expect to get from Social Security if you make $40,000
‘Catch Me If You Can’ con artist says this scam is making a comeback
Prevent tax return anxiety by following these steps
Top earners and corporations get a tax increase
Under the plan, individuals making more than $1 million annually and couples who make more than $2 million per year will see their income tax rate increase to 9.65% from 8.82%.
The bill will also create two new tax brackets aimed at the highest earners.
Those who make more than $5 million per year will see their personal income tax rate grow to 10.3%, and those who are bringing in more than $25 million annually will see a rate of 10.9%.
The budget would also increase taxes on corporations, boosting the business income tax rate to 7.25% from 6.5% for three years through tax year 2023 for those with business income greater than $5 million, according to the plan.
Combined with the personal income tax hikes, the increased levies are estimated to raise about $4.3 billion annually.
Taxes in New York City will be the highest in the U.S. Will other states follow?
Millionaires in New York City will soon face the highest personal income taxes in the nation.
The state tax rate, combined with city taxes, would be between 13.5% and 14.8%, beating out California, which currently holds the title with a 13.3% levy on taxpayers making more than $1 million, according to the Tax Foundation.
“It’s important to remember millionaire’s taxes are nothing new, there’s already various states that have proposed these taxes,” said Jessica Perna, a tax partner in private client services at Ernst & Young. She added that many states are looking to raise revenues after getting hit hard during the pandemic.
Last year, New Jersey passed its own millionaire’s tax, boosting the income tax rate for those making $1 million or more. Lawmakers have considered raising taxes on millionaires in a number of other states including California, Massachusetts and Maryland.
The tax hikes may not be permanent
The way the plan is written means that the tax increases will likely be retroactively applied from the beginning of the year.
Those affected by the tax hike may want to take certain steps now, according to Perna.
If you’re in a bracket that would see a bump and got a bonus early in the year, or made a major transaction, you’d want to make sure you paid enough in taxes. At the end of the year, you could be hit with a tax bill including penalties and interest if you underpaid your liability.
The tax increases are currently scheduled to end in 2027. But experts are wary.
“I’d be leery of that,” said Mark Steber, chief tax information officer at Jackson Hewitt. “Temporary things have a way of becoming permanent.”
What about SALT deductions?
On Wednesday, Cuomo said that he expects the tax hikes in his plan to be offset by a repeal of the federal cap on state and local tax deductions.
If the so-called SALT cap, currently set at $10,000, is repealed, it would mean that net taxes are 37% lower, according to Cuomo.
“After SALT the taxes will be lower than before” Cuomo said during a Wednesday briefing, adding that he’d spoken with lawmakers and President Joe Biden about the matter. “But they have to repeal SALT which is what they said they would do.”
However, it is not clear the SALT cap will be repealed. A group of Democratic state governors including Cuomo recently wrote to Biden encouraging a rollback of the Trump-era cap, which House Speaker Nancy Pelosi also supported. In January, Senate Majority Leader Chuck Schumer, D-N.Y., along with Sen. Kirsten Gillibrand, D-N.Y., introduced legislation that would eliminate it.
Still, taking away the cap would cost money that Democrats would have to find. If the cap had been eliminated for years 2020 and 2021, it would’ve cost $48.9 billion and $88.7 billion, respectively, according to the nonpartisan Joint Committee on Taxation.
In addition, many people wouldn’t benefit from a repeal of the SALT cap, according to Slott.
“For higher-income New Yorkers, it sounds good to repeal it, but it does nothing for most people,” he said.
The top 20% of earners would reap more than 96% of the benefits of a SALT repeal, and the top 1% of all earners would see 57% of benefits, according to the Tax Policy Center.
Will high earners move?
Whenever tax increases come up, especially at the state level, those affected may wonder if they should move to a state with a lower tax liability.
Especially as so many have worked remotely due to the pandemic, it’s possible that some could make permanent moves to lower-tax states.
“Are you really going to be in that much of a hurry to embrace what’s effectively a 15% tax that you can avoid by rearranging your affairs?” said Edward Renn, a partner at the Withers law firm, adding that many high-income earners will likely at least consider a move or working remotely to avoid the hike.
Still, there are other considerations to make before moving for tax reasons, even though individuals who are targeted by this increase have more resources than most to relocate.
“I find when people move for tax reasons often it’s not a good idea,” said Slott.
Renn agreed. “I always advise clients to not let the tax tail wag the dog,” he said. “Go where you’re happy.”
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.