The New York State (NYS) Department of Taxation and Finance has posted notices on its web site addressing the recent law changes impacting individual estimated tax payments for the remaining quarters for 2009. The budget agreement reached in April retroactively increased the top tax rate from 6.85 percent to 8.97 percent and disallows all itemized deductions other than 50 percent of charitable contributions for taxpayers with New York AGI above $1,000,000, for the years 2009 - 2011.

The estimated payment thresholds for avoiding an underpayment penalty are unchanged—the lesser of 90 percent of the 2009 tax or 110 percent of the 2008 tax (where NY AGI is greater than $150,000). However, if basing 2009 estimated tax payments on the safe harbor of 110 percent of the 2008 tax liability, the 2008 tax must be recomputed under the 2009 law changes.

Assume a New York City (NYC) resident individual had NY AGI of $1,500,000 and itemized deductions allowable for New York (50 percent) of $200,000 (real estate taxes + mortgage interest + investment interest + charitable contributions) for 2008. Further assume that 50 percent of the contributions amounted to $30,000. This taxpayer incurred NYS personal income tax on $1,300,000 of taxable income at a rate of 6.85 percent of approximately $89,000 for 2008. Under the 2009 law changes, this same taxpayer would incur NYS tax on $1,470,000 of taxable income at a rate of 8.97 percent of approximately $132,000, a 48 percent increase in tax. Instead of basing 2009 estimated tax payments on 110 percent of $89,000 ($98,000) the safe harbor would become 110 percent of $132,000 ($145,000).

NYC resident tax will need to be tacked on. It is conceivable that New York City will also hike its top personal income tax rate retroactively when its budget is adopted near June 30th and a similar exercise may be necessary for third and fourth quarter 2009 estimated tax payments, taking into account higher NYC tax.