By:  Heather L. Santonino

Sometime in May many New York State taxpayers received an important notice from New York State Department of Taxation and Finance.  This Notice (N-09-7) summarized recent tax law changes affecting certain estimated tax filers.

Effective for a 3-year period beginning January 1, 2009, the personal income tax rate was increased from 6.85% to 8.97% for all tax filers with a taxable income over $500,000.  The rate was increased to 7.85% for taxpayers filing jointly with a taxable income over $300,000, for heads of household with taxable income above $250,000, and for single filers above $200,000.  Effective on April 7, 2009, individuals with New York State or New York City adjusted gross incomes over $1 million may not claim any itemized deductions except for 50% of their charitable deductions.

These recent tax law changes impact 2009 personal income estimated tax payments.  The penalty for underpayment of estimated tax has been modified.  In order to avoid the penalty, the total amount of estimated tax and withholding tax must be the lesser of 90% of your 2009 tax or 110% of your 2008 tax.  However, under the new law, when determining whether 110% of your 2008 tax was paid, you must recompute your 2008 tax using the 2009 tax rates and itemized deduction rules.  New York State stated in their notice that there will be no penalty for any shortage in your April 15, 2009 payment, provided that the shortage is included in your June 15, 2009 payment.

We have prepared the attached example to illustrate the effects of the changes to the New York State tax law.  The example is shown for married taxpayers filing jointly with New York Adjusted Gross Income of $1,200,000.  In 2008 the taxpayers’ New York State Income Tax was $79,944.  Prior to the recent tax law changes the taxpayers would have avoided an underpayment penalty by remitting 110% of their 2008 tax liability ($79,944*110%=$87,938) in 2009 estimated tax payments.  However, under the new law, the taxpayers must remit 110% of their recomputed 2008 tax liability based on the new 2009 tax rates and itemized deduction rules.  In the enclosed example, you will see that the taxpayers’ recomputed liability is $106,295.  In order to avoid an underpayment penalty for 2009, the taxpayers must remit 110% of their recomputed 2008 tax liability ($106,295*110%=$116,925).  **Please note this analysis was prepared assuming that 90% of the taxpayers’ 2009 tax liability would be higher than 110% of the recomputed 2008 liability.

In reviewing the example you will find that the taxpayers’ tax increased $26,351 from 2008 to 2009 with unchanged income.  The $26,351 increase is approximately 33% of the 2008 tax liability of $79,944.  We have found that on average taxpayers with over $1 million in New York Adjusted Gross Income are experiencing a 33% overall tax increase from the 2008 tax year.

If you should have any questions or concerns, please contact your Sheehan & Company service partner.

ANALYSIS OF CHANGE IN 2009 NEW YORK STATE TAX
SAMPLE CLIENT

ASSUMPTIONS:
FILING STATUS:  MARRIED FILING JOINT
NEW YORK STATE RESIDENT