New York’s Quasi-Progressive Income Tax System

by May 25, 2023All, Tax Planning

New York’s Income Tax System

At first glance, New York appears to have a progressive income tax system. This means that one’s taxable income is divided into various brackets, and each portion is only taxed at the rate corresponding to that income range. For example, if you had a taxable income of $75,000 and you were single, the first $8,500 would be taxed at 4%, the income between $8,500-$11,700 would be taxed at 4.5%, the income between $11,700-$13,900 would be taxed at 5.25%, and the income between $13,900-$75,000 would be taxed at 5.85%. NY even simplifies this by performing the initial calculations, so you only need to find your current marginal tax bracket and add the pre-calculated tax ($600) to the marginal tax rate (5.85%) of the excess over the lower bound of the tax bracket ($13,900). As a result, your effective tax rate would be 5.57%, not 5.85%, due to some of the income being taxed at a lower rate. For those familiar with the Federal tax system, this seems straightforward.

However, New York has a special way of calculating your taxes once your NY Adjusted Gross Income (AGI) is more than $107,650 with its tax computation worksheets. Depending on your situation, this will raise your effective taxes beyond a normal progressive tax system.

Tax Computation Worksheets

Depending on your filing status, AGI, and taxable income, you will fall into one of 16 tax computation worksheets. For example, if you’re single and have around $1,112,551 AGI / $1,077,551 taxable income (due to $35,000 in itemized deductions), you would fall under Tax Computation Worksheet 9.

This worksheet covers those in the 9.65% marginal tax bracket. Your previous income before this bracket would have been taxed lower, making your effective tax rate lower than 9.65%. However, according to this worksheet, the first $50,000 of AGI entering this worksheet will cause you to pay an additional tax (incremental benefit amount, line 5) on your previously lower-bracketed income. This will make your effective tax rate equal to your marginal tax rate once you exhaust the $50,000. Since the incremental benefit amount is $30,171, once you enter the worksheet and before you exhaust the $50,000, you will pay an ADDITIONAL 60.34% tax for every dollar you earn, on top of your standard NY marginal tax rate, federal, and local income taxes.
To make matters worse, you’ll generally get bumped up to a new tax worksheet based on your taxable income, but your AGI will likely be higher than the minimum due to standard and itemized deductions. In the example above, you entered this worksheet by a single dollar, but your AGI is already $35,000 more than the minimum AGI of this worksheet. This means you are already $35,000 into the $50,000 window where you pay additional taxes. Following the worksheet, this single dollar would have caused you to pay an additional $21,119.70 in taxes.

What Can You Do?

You should be mindful of when you enter a new tax computation worksheet since you will pay elevated taxes for the first $50,000 of AGI. If you’re on the cusp of entering a worksheet, especially once you’re past $2,155,350 MFJ, $1,077,550 S, or $1,616,450 (since the incremental benefit amounts increase dramatically here), try to defer income or increase your deductions if possible. For example, if you can delay taking a capital gain or engage in tax loss harvesting to reduce your income slightly, those could be viable solutions.
Also, although NY only allows a 50% charitable itemized deduction, it may actually net you a greater return than the amount you donated. This is due to avoiding the initial $50,000 of increased taxation of a new tax computation worksheet in addition to your standard deduction for federal and state taxes.
Please refer to the following tables (2023 tax year) for the incremental benefits that you should be mindful of. Knowing these can help you strategically manage your taxable income and potentially avoid large tax increases. The numbers in the below tables may change from year to year, but unless NY changes the logic, understanding how the tables are used is important. Additionally, one should assess the total tax picture of their situation and not just a single state when making decisions.

Tax Computation Tables

Married Filing Jointly / Qualified Surviving Spouse

Worksheet AGI Taxable Income Incremental Benefit
1 $107,651 – $25,000,000 $0 – $161,550 Your effective tax rate will be brought up to 5.85% in the first $50,000 of income through a different calculation
2 $161,551 – $25,000,000 $161,551 – $323,200 $646
3 $323,201 – $25,000,000 $323,201 – $2,155,350 $1,940
4 $2,155,351 – $25,000,000 $2,155,351 – $5,000,000 $60,349
5 $5,000,001 – $25,000,000 $5,000,001+ $32,500
6 $25,000,001+   All taxable income is taxed at a flat rate of 10.9%

Single / Married Filing Separately

Worksheet AGI Taxable Income Incremental Benefit
7 $107,651 – $25,000,000 $0 – $215,400 Your effective tax rate will be brought up to 6.25% in the first $50,000 of income through a different calculation
8 $215,401 – $25,000,000 $215,401 – $1,077,550 $1,293
9 $1,077,551 – $25,000,000 $1,077,551 – $5,000,000 $30,171
10 $5,000,001 – $25,000,000 $5,000,001+ $32,500
11 $25,000,001+   All taxable income is taxed at a flat rate of 10.9%

Head of Household

Worksheet AGI Taxable Income Incremental Benefit
12 $107,651 – $25,000,000 $0 – $269,300 Your effective tax rate will be brought up to 6.25% in the first $50,000 of income through a different calculation
13 $269,301 – $25,000,000 $269,301 – $1,616,450 $1,616
14 $1,616,451 – $25,000,000 $1,616,451 – $5,000,000 $45,261
15 $5,000,001 – $25,000,000 $5,000,001+ $32,500
16 $25,000,001+   All taxable income is taxed at a flat rate of 10.9%

 

Sources

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