How Does the Millionaire Tax in NY Work?

The term “millionaire tax” is a colloquialism for New York State’s highest personal income tax brackets. It is not a separate tax but the upper tiers of the state’s progressive income tax system, where tax rates increase as a taxpayer’s income rises. This means individuals with higher earnings are subject to higher rates on the portion of their income that falls into those upper brackets. The core principle is that not all income is taxed at the same rate; different portions of income are taxed at incrementally higher rates. The specific income thresholds and corresponding rates define who is affected by this so-called millionaire tax.

New York State Income Tax Brackets

New York employs a progressive tax structure with nine distinct brackets, where tax rates climb with income. For the 2024 tax year, the rates begin at 4% for the lowest earners and ascend to 10.9% for the highest, with the “millionaire tax” referring to the top three brackets. A common misunderstanding is that the highest rate applies to a person’s entire income; this is incorrect due to the marginal nature of the tax system. For example, a single filer with a taxable income of $1.5 million would not pay 9.65% on the entire amount. Instead, their income is taxed in pieces, with only the income over $1,077,550 being subject to the 9.65% rate.

The highest tax rates and their corresponding income thresholds for single filers in 2024 are 9.65% for income between $1,077,551 and $5,000,000. Income between $5,000,001 and $25,000,000 is taxed at 10.3%, and any income exceeding $25,000,000 is taxed at 10.9%. For those who are married and filing jointly, these same rates apply, but the income thresholds are higher. High-income earners must also be aware of a supplemental tax recapture provision, which can effectively increase the marginal tax rate for income falling within a specific range.

Determining Who is Subject to the Tax

The obligation to pay New York State income tax depends on a person’s residency status. The state defines three categories of taxpayers: full-year residents, part-year residents, and nonresidents. Full-year residents are taxed on their worldwide income, regardless of where it was earned. A person is considered a resident if their domicile, or permanent home, is in New York.

A person can also be treated as a resident for tax purposes under the “statutory residency” rule. This rule applies to individuals who maintain a “permanent place of abode” in New York and spend more than 183 days of the tax year in the state. A permanent place of abode is a dwelling suitable for year-round use, and the 183-day count is strictly enforced, with any part of a day spent in New York counting as a full day. Nonresidents are only taxed on income derived from New York sources, like wages earned in the state or gains from the sale of New York real estate. Part-year residents are taxed as residents on all income earned during the portion of the year they lived in New York and as nonresidents on New York-source income earned while living outside the state.

Calculating New York Taxable Income

The calculation of New York taxable income, the figure to which tax rates are applied, begins with a taxpayer’s Federal Adjusted Gross Income (AGI). From there, New York requires specific adjustments—additions and subtractions—to account for differences between federal and state tax law. These modifications result in what is known as New York Adjusted Gross Income (NYAGI).

Certain items not taxed at the federal level are taxable in New York and must be added back to the federal AGI. An example is interest income from bonds issued by other states and their municipalities. Another addition is any portion of college tuition savings program distributions not used for qualified higher education expenses.

Conversely, some income taxed federally is exempt from New York tax and can be subtracted. A significant subtraction is interest income from U.S. government bonds. Additionally, for taxpayers aged 59½ or older, up to $20,000 of certain pension and annuity income can be excluded, and Social Security benefits taxable federally are fully exempt from New York State tax.

After these adjustments determine NYAGI, taxpayers can subtract either the New York standard deduction or their itemized deductions. The standard deduction for a single filer is $8,000, while for married couples filing jointly it is $16,050. If a taxpayer’s itemized deductions exceed the standard deduction, they may choose to itemize to achieve a lower final taxable income.

Interaction with New York City Taxes

For individuals living in one of the five boroughs, the total income tax burden is higher because they are subject to a separate New York City (NYC) personal income tax in addition to the state tax. This local tax operates with its own set of brackets and rates, which are applied to the same taxable income figure calculated for state purposes. The NYC income tax is also a progressive system. For the 2024 tax year, the rates for a single filer begin at 3.078% on income up to $12,000 and increase to a top rate of 3.876% on income over $50,000.

This tax is based on residency within the city. Nonresidents who work in New York City are not subject to the NYC personal income tax, although they must still pay New York State tax on their city-sourced earnings. The calculation is integrated into the state tax return, meaning residents of the city file a single return to handle both their state and city tax obligations.

Tax Planning Considerations

Managing a high New York tax liability involves strategic financial planning, with a focus on residency and income management. One strategy is legally changing one’s tax domicile to a state with a lower or no income tax. This requires demonstrating a clear intent to abandon the New York home and establish a new permanent base elsewhere, a process that involves changing factors like voter registration and driver’s license.

For those remaining in New York, income timing can be an effective tool. This might involve deferring a large bonus into a future year when income is expected to be lower, or accelerating income into the current year if tax rates are expected to rise.

Maximizing state-level deductions is another consideration. This includes making strategic charitable contributions, such as donating appreciated securities instead of cash to avoid capital gains tax while still receiving a deduction. Investing in tax-exempt municipal bonds issued by New York or its localities can also reduce the overall tax burden, as the interest from these bonds is exempt from both state and city taxes.