New York State income tax bracket is not a marginal rate?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sat Apr 14, 2018 5:36 am

New York state taxes are very strange and very, very onerous.

I am in a state of shock from what I just learned from my 2017 tax return. If you make one dollar extra in NY, you can owe $40,000 extra in NY state taxes. I know because this just happened to me. This is a serious tax cliff, absolutely shocking.

Due to some unusual circumstances and a 2017 life event, my NY tax “bracket” for 2017 jumped up to the highest bracket of 8.82%. By passing this threshold by 1 dollar, the 8.82% tax applied to every dollar of income, all the way back to the first dollar earned. Earning 1 dollar over the threshold caused me to owe more than $40,000 extra in state taxes. That works out to a marginal tax rate of over 4 million percent.

I donated a substantial sum to a variety of charities in 2017. A donation of 1 more dollar could have saved me $40,000 in state taxes. I am trying to wrap my head around this.

The craziest aspect of all of this is that this top tax rate of 8.82% is not a marginal tax rate, it apparently transitions to an absolute tax rate. The lower brackets in NY appear to be the usual marginal brackets. I wish I had known this fact in advance. I have not seen anything written about this, and a quick google search didn’t come up with anything. It was quite ignorant of me not to have known about this, in particular because the taxes we pay are way more than the sum total of all of our annual living expenses.

I went to look at the tax tables for calculating NY taxes. On one page it looks like all the brackets are marginal, including the top bracket, but on the other page it looks like the top bracket is absolute. I wish I could find out more to help me better understand how this works.

:oops: :oops: :oops:

abner kravitz
Posts: 330
Joined: Tue May 05, 2015 7:42 am
Location: Beaufort County, SC

Re: New York State income tax bracket is not a marginal rate?

Post by abner kravitz » Sat Apr 14, 2018 6:00 am

That does not seem right to me. I just looked at the brackets on a state website, and they appear to be marginal. Disclaimer - not a resident.

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 6:27 am

After AGI hits $1,127,550 (on a single return), NYS tax switches to a straight 8.82% of entire taxable income.

https://docs.google.com/viewer?url=http ... wkshts.pdf

Incredibly arcane system with a bunch of different computation schemes spliced together.

https://www.tax.ny.gov/pit/file/tax_tables.htm

Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

Re: New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sat Apr 14, 2018 6:51 am

On one page NY State has this tax table:

$      0 $ 8,500 4% of line 38
8,500 11,700   $ 340 plus 4.5% of the excess over $ 8,500
  11,700 13,900    484 plus 5.25% " " " " 11,700
  13,900 21,400   600 plus 5.9% " " " " 13,900
  21,400 80,650 1,042 plus 6.45% " " " " 21,400
80,650 215,400 4,864 plus 6.65% " " " " 80,650
  215,400 1,077,550 13,825 plus 6.85% " " " " 215,400
1,077,550 ....................... 72,882 plus 8.82% " " " " 1,077,550

This indicates the rates are marginal. But on another page they have a different calculation which makes it a straight tax. What is this confusion of different rates marginal vs straight depending which page of the tax calculation that you refer to?

User avatar
samsoes
Posts: 844
Joined: Tue Mar 05, 2013 9:12 am
Location: Northeast Rat Race

Re: New York State income tax bracket is not a marginal rate?

Post by samsoes » Sat Apr 14, 2018 6:58 am

Archimedes wrote:
Sat Apr 14, 2018 6:51 am
On one page NY State has this tax table:

$      0 $ 8,500 4% of line 38
8,500 11,700   $ 340 plus 4.5% of the excess over $ 8,500
  11,700 13,900    484 plus 5.25% " " " " 11,700
  13,900 21,400   600 plus 5.9% " " " " 13,900
  21,400 80,650 1,042 plus 6.45% " " " " 21,400
80,650 215,400 4,864 plus 6.65% " " " " 80,650
  215,400 1,077,550 13,825 plus 6.85% " " " " 215,400
1,077,550 ....................... 72,882 plus 8.82% " " " " 1,077,550

This indicates the rates are marginal. But on another page they have a different calculation which makes it a straight tax. What is this confusion of different rates marginal vs straight depending which page of the tax calculation that you refer to?
You use the table above as the initial tax calcualtion step. If you're taxable income meets the thresholdes shown in the worksheets referenced by dodecahedron, then additional tax is tacked-on. Connecticut has something similar - they call it "recapture." It's awful.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)

grok87
Posts: 8302
Joined: Tue Feb 27, 2007 9:00 pm

Re: New York State income tax bracket is not a marginal rate?

Post by grok87 » Sat Apr 14, 2018 7:27 am

Thanks. Good to know,
Are ny state and ct the only ones?
Keep calm and Boglehead on. KCBO.

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 7:41 am

Archimedes wrote:
Sat Apr 14, 2018 5:36 am
I donated a substantial sum to a variety of charities in 2017. A donation of 1 more dollar could have saved me $40,000 in state taxes. I am trying to wrap my head around this.
I do not believe this is correct. The way the different tax computation regimes splice together around the ~$1M mark is based on changes in AGI, not based on changes in taxable income. Donating a dollar more to charity would change taxable income but not AGI because charitable deductions are a "below-the-line" deduction.

User avatar
teen persuasion
Posts: 580
Joined: Sun Oct 25, 2015 1:43 pm

Re: New York State income tax bracket is not a marginal rate?

Post by teen persuasion » Sat Apr 14, 2018 7:44 am

Is this the so-called Millionaires' tax?

https://www.bna.com/new-york-millionai ... 982086533/

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 7:51 am

samsoes wrote:
Sat Apr 14, 2018 6:58 am
If you're taxable income meets the thresholdes shown in the worksheets referenced by dodecahedron, then additional tax is tacked-on. Connecticut has something similar - they call it "recapture."
In NY, as teen persuasion noted above, it is called the "millionaire's tax," since it only applies to taxpayers with AGIs over a million. It raises a lot of revenue for NYS and half of that revenue comes from nonresidents filing nonresident NYS taxes. It is problematic for the unwary who have unusual once in a lifetime events (e.g., selling a business).

The actionable advice is that if you are doing something very "lumpy" like selling a business or other asset with a large embedded capital gain, you may wish to consult a knowledgeable tax professional to see if there is a way to structure the deal in a way that would spread the income over more than one year.

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 8:14 am

By the way, NYS has a number of odd idiosyncratic tax discontinuities that can affect taxpayers with a wide range of incomes.

E.g., there is a NYS sales tax exemption on items of clothing priced at less than $110 per unit (or pair in the case of footwear). If the price of the item hits $110, sales tax on the entire price is due.

STAR property tax breaks drop abruptly when income hits critical points.

There are cliff effects in the NYS estate tax system for estates slightly above the ~$5M exclusion amount.

User avatar
grabiner
Advisory Board
Posts: 22545
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: New York State income tax bracket is not a marginal rate?

Post by grabiner » Sat Apr 14, 2018 8:32 am

dodecahedron wrote:
Sat Apr 14, 2018 6:27 am
After AGI hits $1,127,550 (on a single return), NYS tax switches to a straight 8.82% of entire taxable income.

https://docs.google.com/viewer?url=http ... wkshts.pdf

Incredibly arcane system with a bunch of different computation schemes spliced together.

https://www.tax.ny.gov/pit/file/tax_tables.htm
According to the worksheet, the millionaires' tax phases in from $1,077,550 to $1,127,550. If your AGI is $1,077,551, you compute your regular tax on your taxable income, and pay 1/50,000 of the difference between that and the flat 8.82%. This may give a marginal tax rate of about 40% for singles, 80% for married, but no huge cliff.

The cliff that the OP hit is probably a different one; see page 39 of the IT-201-I Instructions. New York phases out itemized deductions as your AGI increases. The lower phase-outs are gradual, but at an income of $525,001-1,000,000, you deduct half your itemized deductions, and at $1,000,001, you deduct half your charity and cannot deduct anything else. Thus an extra dollar of AGI can cost you the deduction for half your mortgage interest, business expenses and property tax.
Wiki David Grabiner

Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

Re: New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sat Apr 14, 2018 9:36 am

I did have my CPA help me with setting things up, but I also try to understand these issues on my own as well. It isn't really a good time to bother the CPA since he is swamped as the tax deadline approaches, so I posted here knowing that I always learn a lot when I ask a question.

Since taxes are my biggest expense, far more than anything else, it makes sense for me to be as knowledgable as possible. I feel like I should have known more about this before it happened. I do recall the CPA calculating how we should arrange this so that the state taxes are higher in 2017 when they are deductible, and lower in 2018 when they are not. But I am still not able to fully wrap my head around all of this.

The shocking thing for me was going a little bit over the threshold and then owing this much higher tax rate on my entire income for 2017.

Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

Re: New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sat Apr 14, 2018 9:42 am

The actionable issue here is learning how the NY state tax system works so I can avoid this kind of tax cliff in the future.

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 10:01 am

grabiner wrote:
Sat Apr 14, 2018 8:32 am
The cliff that the OP hit is probably a different one; see page 39 of the IT-201-I Instructions. New York phases out itemized deductions as your AGI increases. The lower phase-outs are gradual, but at an income of $525,001-1,000,000, you deduct half your itemized deductions, and at $1,000,001, you deduct half your charity and cannot deduct anything else. Thus an extra dollar of AGI can cost you the deduction for half your mortgage interest, business expenses and property tax.
Thanks for highlighting this fascinatingly obscure and arcane provision of NYS tax--this is a region where few people have reason to look. What a Rube Goldberg machine--this is true of income taxes in general but NYS taxes in particular. I imagine that few folks like the OP who have one time events putting them over this threshold would be aware of such things. Certainly the simple comparative tax summaries showing the "top tax rates" in each state can't possibly take these provisions into account, important as they might be in practice. Caveat taxpayer. Actionable advice: it may be worth moving out of NYS and establishing domicile elsewhere before doing things like selling your business or other assets with a lot of appreciation.

Mydanyale
Posts: 27
Joined: Thu Apr 12, 2018 8:33 pm

Re: New York State income tax bracket is not a marginal rate?

Post by Mydanyale » Sat Apr 14, 2018 10:08 am

Wow :?

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 10:27 am

grabiner wrote:
Sat Apr 14, 2018 8:32 am
The cliff that the OP hit is probably a different one; see page 39 of the IT-201-I Instructions. New York phases out itemized deductions as your AGI increases. The lower phase-outs are gradual, but at an income of $525,001-1,000,000, you deduct half your itemized deductions, and at $1,000,001, you deduct half your charity and cannot deduct anything else. Thus an extra dollar of AGI can cost you the deduction for half your mortgage interest, business expenses and property tax.
And at AGI over $10M, you deduct 25% of your charity and can't deduct anything else...

hicabob
Posts: 2690
Joined: Fri May 27, 2011 5:35 pm
Location: cruz

Re: New York State income tax bracket is not a marginal rate?

Post by hicabob » Sat Apr 14, 2018 10:28 am

dodecahedron wrote:
Sat Apr 14, 2018 10:01 am
Actionable advice: it may be worth moving out of NYS and establishing domicile elsewhere before doing things like selling your business or other assets with a lot of appreciation.
If NY tax collection is anything like the feared California Franchise Tax Board you had better move the biz to a new state a few years in advance of selling else they will go what they assume is their chunk.

Maverick3320
Posts: 486
Joined: Tue May 12, 2015 2:59 pm

Re: New York State income tax bracket is not a marginal rate?

Post by Maverick3320 » Sat Apr 14, 2018 10:29 am

Archimedes wrote:
Sat Apr 14, 2018 9:36 am
I did have my CPA help me with setting things up, but I also try to understand these issues on my own as well. It isn't really a good time to bother the CPA since he is swamped as the tax deadline approaches, so I posted here knowing that I always learn a lot when I ask a question.

Since taxes are my biggest expense, far more than anything else, it makes sense for me to be as knowledgable as possible. I feel like I should have known more about this before it happened. I do recall the CPA calculating how we should arrange this so that the state taxes are higher in 2017 when they are deductible, and lower in 2018 when they are not. But I am still not able to fully wrap my head around all of this.

The shocking thing for me was going a little bit over the threshold and then owing this much higher tax rate on my entire income for 2017.
It isn't a good time to bother your CPA with a $40,000 question?

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 10:30 am

hicabob wrote:
Sat Apr 14, 2018 10:28 am
dodecahedron wrote:
Sat Apr 14, 2018 10:01 am
Actionable advice: it may be worth moving out of NYS and establishing domicile elsewhere before doing things like selling your business or other assets with a lot of appreciation.
If NY tax collection is anything like the feared California Franchise Tax Board you had better move the biz to a new state a few years in advance of selling else they will go what they assume is their chunk.
NYS is notorious for extremely challenging residency audits. Check out this case, ultimately won by the taxpayer after great difficulty, but still potentially subject to appeal by NYS. Another classic case here.

inbox788
Posts: 5403
Joined: Thu Mar 15, 2012 5:24 pm

Re: New York State income tax bracket is not a marginal rate?

Post by inbox788 » Sat Apr 14, 2018 10:53 am

Archimedes wrote:
Sat Apr 14, 2018 9:42 am
The actionable issue here is learning how the NY state tax system works so I can avoid this kind of tax cliff in the future.
Another actionable item is moving to NJ/CT or one of the other neighboring states, or further to a no income tax state. But you might just be trading one set of problems for another.

https://www.bankrate.com/finance/taxes/ ... rse-1.aspx

Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

Re: New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sat Apr 14, 2018 11:09 am

Yes, it would be great not to have to pay the onerous taxes, but NY is the state where I started my businesses, where I have lots of friends and family, and where home is.

The best financial decision would be to get out of Dodge, but easier said than done.

User avatar
dodecahedron
Posts: 3667
Joined: Tue Nov 12, 2013 12:28 pm

Re: New York State income tax bracket is not a marginal rate?

Post by dodecahedron » Sat Apr 14, 2018 11:15 am

Archimedes wrote:
Sat Apr 14, 2018 11:09 am
Yes, it would be great not to have to pay the onerous taxes, but NY is the state where I started my businesses, where I have lots of friends and family, and where home is.

The best financial decision would be to get out of Dodge, but easier said than done.
I can relate. While my NYS AGI presents no problems, so my NYS income tax is not much of a problem, the real estate taxes on my home in upstate NY make other folks gasp in horror. (I live in upstate NY in a county with one of the highest property tax rates in the country.) But home is where the heart is--I count myself fortunate to be able to afford to pay those taxes and enjoy the quality of life made possible by those taxes.

FactualFran
Posts: 712
Joined: Sat Feb 21, 2015 2:29 pm

Re: New York State income tax bracket is not a marginal rate?

Post by FactualFran » Sat Apr 14, 2018 12:08 pm

Archimedes wrote:
Sat Apr 14, 2018 5:36 am
I went to look at the tax tables for calculating NY taxes. On one page it looks like all the brackets are marginal, including the top bracket, but on the other page it looks like the top bracket is absolute. I wish I could find out more to help me better understand how this works.
Looking at the Tax Computation Worksheets, the phase-out of the tax rates of lower tax brackets should occur over a range of $50,000 of taxable income, not over a range of one dollar. I am in a phase-out range of a bracket lower than the maximum bracket. My marginal rate is about 1% more that the bracket rate.

scrabbler1
Posts: 2208
Joined: Fri Nov 20, 2009 2:39 pm

Re: New York State income tax bracket is not a marginal rate?

Post by scrabbler1 » Sat Apr 14, 2018 2:51 pm

I learned of this feature back in 2008 when I received a large, lump-sum distribution from cashing out about $300k of company stock. The top tax rate back then was 6.85%, but that rate applied to all my income, not just the income in the bracket shown in the tax table where the 6.85% bracket began. Back then, that top rate kicked in at a pretty low amount, so it didn't really cost me much more. Still.......it was a sneaky way for the pols to be able to make certain claims about "the top rate" when it came to state income taxes.

edge
Posts: 3319
Joined: Mon Feb 19, 2007 7:44 pm
Location: Great Falls VA

Re: New York State income tax bracket is not a marginal rate?

Post by edge » Sat Apr 14, 2018 4:24 pm

I live in NY. I don’t find the quality of life to be proportional with the tax burden. Not even close.
dodecahedron wrote:
Sat Apr 14, 2018 11:15 am
Archimedes wrote:
Sat Apr 14, 2018 11:09 am
Yes, it would be great not to have to pay the onerous taxes, but NY is the state where I started my businesses, where I have lots of friends and family, and where home is.

The best financial decision would be to get out of Dodge, but easier said than done.
I can relate. While my NYS AGI presents no problems, so my NYS income tax is not much of a problem, the real estate taxes on my home in upstate NY make other folks gasp in horror. (I live in upstate NY in a county with one of the highest property tax rates in the country.) But home is where the heart is--I count myself fortunate to be able to afford to pay those taxes and enjoy the quality of life made possible by those taxes.

Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

Re: New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sat Apr 14, 2018 6:55 pm

I went back and struggled through the different NY State tax tables and the various thresholds. I was wrong in my initial calculation.

My income went over the threshold by 50,000 (the number that I mistakenly thought was the next bracket shows up on the tax calculation chart as the threshold where your first dollar is fully taxes at the highest rate) which then put all of my 2017 income into the highest bracket starting from the first dollar of earnings. This resulted in an extra 40,000 in NYS tax. So the marginal rate for me on my extra earnings from NY was actually 80% on my earnings above the threshold cliff. Then add the federal 39.6% and the phaseouts, and I was taxed well over 100% on these extra earnings.

There is nowhere that NY State discloses widely that for some taxpayers their tax brackets are not calculated as marginal tax brackets, but rather as absolute taxes on your first dollar of earnings. If I knew this I could have stayed home for a month and relaxed instead of receiving negative pay from the state and federal government for my extra work and earnings.

student
Posts: 2523
Joined: Fri Apr 03, 2015 6:58 am

Re: New York State income tax bracket is not a marginal rate?

Post by student » Sat Apr 14, 2018 8:20 pm

I don't know whether this will be helpful. Have you tried entering all the numbers rounding to the nearest dollar vs not rounding? It is possible that the result may be off by a dollar.

bsteiner
Posts: 3440
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: New York State income tax bracket is not a marginal rate?

Post by bsteiner » Sat Apr 14, 2018 8:21 pm

While the benefit of the lower brackets is recaptured and itemized deductions are phased out, remember that the New York income tax rates used to go up to 15%, and for a few years there was a temporary surcharge that brought it up to 15.375%.

Tanelorn
Posts: 1520
Joined: Thu May 01, 2014 9:35 pm

Re: New York State income tax bracket is not a marginal rate?

Post by Tanelorn » Sun Apr 15, 2018 7:21 pm

Thank you for sharing. I agree that as taxes become your largest expense item, it makes a lot of sense to try to learn as much as possible so you can plan in advance to avoid such cliffs, perhaps accelerate or delay some charity based on being close to some edge, etc.

Archimedes
Posts: 123
Joined: Wed Feb 15, 2017 11:27 am

Re: New York State income tax bracket is not a marginal rate?

Post by Archimedes » Sun Apr 15, 2018 7:42 pm

Thank you to everyone who responded. I now have a clearer understanding of how NY State taxes work.

petesamprs
Posts: 51
Joined: Mon May 30, 2016 8:35 am

Re: New York State income tax bracket is not a marginal rate?

Post by petesamprs » Sun Apr 15, 2018 7:45 pm

I had this exact same realization a couple years ago: viewtopic.php?t=192321

Post Reply