STATE AND LOCAL TAXATION

March 2000

Income Tax Changes Taking Effect in 1999

By Emanuel Eichler, CPA, Cornick, Garber & Sandler, LLP

The following are highlights of income tax legislation that takes effect in 1999 from the New York State Department of Taxation and Finance Taxpayer Services Division Technical Services Bureau:

New York City Resident Income Tax Rate Reduction

Beginning with tax year 1999, the New York City resident income tax rates will be reduced over a three-year period. In addition, the New York City Safe City, Safe Streets surcharge, which took effect in 1990, expired at the end of 1998. [See Tax Law, sections 1301(a), 1304, 1310(e) and the Administrative Code of the City of New York, sections 11-1701(a), 11-1(b) and 11-1706(c).]

State School Tax Reduction Credit for New York City Residents

As part of the State School Tax Relief (STAR) program enacted in 1997, a refundable State School Tax Reduction Credit is provided against the New York City income tax for New York City residents and part-year residents. The credit was effective for tax years beginning in 1998 and after. If the credit exceeds the taxpayer's New York City personal income tax for the year, the excess will be refunded, without interest. If the taxpayer changes resident status during the year, the credit must be prorated.

For taxable years beginning in 1999, the credit amounts for persons under age 65 have increased as follows:

* For married taxpayers filing jointly (where both spouses are under age 65) and surviving spouses, the credit is increased to $35.
* For unmarried individuals, heads of a household, or married individuals filing separately, the credit is increased to $39.

For persons age 65 and over, the credit remains at $125 for taxpayers that are married filing jointly (if at least one spouse is 65 or older) and for surviving spouses. The credit remains at $62.50 for taxpayers that are unmarried, head of household, or married filing separately. [See Tax Law, section 1310(e).]

Estimated Income Tax Threshold for the Imposition of Penalty

For tax years beginning on and after January 1, 1999, the penalty for underpaying estimated income tax will not be imposed for taxpayers that have a tax due shown on their return (that is, tax reduced by any withholding and any other credits) of less than $300 per jurisdiction (New York State, New York City, and the city of Yonkers). The threshold for tax years prior to January 1, 1999, remains at $100. [See Tax Law, section 685(d)(1), and the Administrative Code of the City of New York, section 11-1785(d)(1).]

Repeal of New York City Nonresident Earnings Tax for New York State Residents

Effective July 1, 1999, the New York City nonresident earnings tax, also known as the "commuter tax," was eliminated for New York State residents that are not residents of New York City but earn wages or carry on a trade or business in New York City.

Eliminating the nonresident earnings tax on these individuals also eliminates the requirement for employers to withhold New York City nonresident earnings tax on wages paid to these individuals. Accordingly, effective for payrolls made on or after July 1, 1999, an employer is not required to withhold New York City nonresident earnings tax from wages of an employee who resides outside of New York City but within New York State. Affected taxpayers may need to change their estimated tax payments for their 1999 New York City nonresident earnings tax. [For further information regarding the repeal, see TSB-M-99(4)(1) and TSB-M-99(6)(1) and Tax Law, section 1305, and General City Law, section 25-m(l)(h).]

Innocent Spouse Relief

For tax years beginning on or after January 1, 1999, the New York State, New York City, and city of Yonkers personal income taxes conform to the Code provisions of joint and several liability and innocent spouse relief relating to joint returns.

Under the new law, a husband and wife that file a joint return are generally jointly and severally responsible for the tax and any interest or penalties due on the return. This means that if one spouse does not pay the tax due, the other may have to. However, one spouse may qualify for relief on a joint return if--

* the tax was understated because the other spouse omitted income or claimed false deductions or credits;
* the husband and wife that filed the joint return are divorced, separated, or no longer living together; or
* given all the facts and circumstances, it would be unfair to hold the spouse liable for the tax.

[See Tax Law, section 654, and the Administrative Code of the City of New York, section 11-1755.]

Interest on Amended Income Tax Returns

For tax years beginning on or after January 1, 1999, section 688(a)(3) of the Tax Law is amended as regards the payment of interest on an overpayment of personal income tax as a result of the filing of an amended return or a claim for credit or refund. Under the new law, interest on an overpayment of tax claimed on an amended return or a claim for credit or refund will be payable from the due date of the original return to the date the refund is issued.

Section 688(c) of the Tax Law, however, is also amended to provide that if the Tax Department refunds the overpayment within 45 days after the amended return or a claim for credit or refund is filed, no additional interest will be paid from the date the amended return or a claim for credit or refund is filed until the date the refund is issued. [See Tax Law, sections 688(a)(3) and 688(c).]

Taxpayers' Bill of Rights Now Extends to Private Collection Agencies

For tax years beginning on or after January 1, 1999, the Taxpayers' Bill of Rights (Article 41) now extends to private businesses (and their employees) with which the Tax Department contracts to provide collection services. These private contractors must extend to taxpayers the same rights and courtesies that are extended to taxpayers by the Tax Department. [See Article 41 of the Tax Law.] *