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Retirement Planning

If You Live In New York, These Tax Rules Might Help You Save On Taxes

If you're a New Yorker, it’s important to be aware of certain tax rules so that you can save more of your hard-earned money.

Articles by Eric Bronnenkant

By Eric Bronnenkant
Head of Tax, Betterment  |  Published: August 8, 2019

It’s no secret that New York income taxes are among the highest in the nation.

We’ll show you how you can take advantage of tax rules for education expenses, investments, and retirement.

Saving on taxes can help you make the most of your money.

New Yorkers get to experience the best of everything—from a beautiful rainbow at Niagara Falls to the classic symbol of our freedom that is the Statue of Liberty. But, it’s not shocking for people living in the Empire State when I remind them that NY income taxes are among the highest in the nation.

The maximum NY state income tax rate is 8.82%. Some New York City residents might pay as much as an additional 3.876% for the privilege of living in the five boroughs: Manhattan, Brooklyn, Queens, The Bronx, and Staten Island.

Because NY taxes are so high, people who are usually uninterested in taxes are all ears once they learn more about how they might be able to save on taxes by taking advantage of certain New York tax laws.

First, a reminder: Due to 2017 tax reform, the federal tax deduction for state and local taxes (otherwise known as SALT) is now limited to $10,000 per year. Prior to the implementation of tax reform in the 2018 tax year, there was no dollar limit on the deduction.

Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

Education

Saving for your child’s college education might feel overwhelming, especially when you’re trying to prioritize education savings with your other goals in life, such as retirement.

NY makes saving for education a little easier by allowing a $10,000 deduction for married couples who contribute to a NY-sponsored 529. Rinse and repeat—because you can contribute and take the deduction every year.

Retirement

Ever wonder why so many people retire in Florida? Sunshine aside, moving to Florida is a common strategy for many NY residents because Florida has no income taxes.

To encourage New Yorkers to retire in their own state, NY and NYC allow a $20,000 retirement income exclusion for people 59 ½ or older. This means that up to $20,000 of income will not have any income taxes. What about married couples? Each spouse who meets the age requirement is entitled to their own $20,000 tax break. This benefit also applies to distributions from IRAs and qualified employer plans like 401(k)s and pensions.

In addition to the $20,000 pension exclusion mentioned above, retirees who were employed by the Federal government, NY state, or local government are also eligible for an unlimited exclusion for retirement income related to that specific employment.

Example: A former NYC firefighter who is currently 60 years old, with a $50,000 annual pension and a $20,000 annual IRA distribution, would be fully exempt from NY and NYC income taxes.

Social Security

Prior to 1984, Social Security benefits were tax-free to all recipients, regardless of how much other income they received. After the 1984 change went into effect, the federal government has expanded the taxation of Social Security benefits to potentially include up to 85% of benefits as taxable income.

NY and NYC have taken a generous step to fully exempt state and local taxes for all Social Security benefits for everyone regardless of income.

Investments

As a state, NY does not always have the power to choose what income it allows exemptions for.

Due to the federal law, NY and NYC are required to exempt U.S. government interest from income taxes. This tax break also applies to mutual funds and ETFs that invest in U.S. government bonds—as long as they represent at least 50% of the assets in the fund.

Municipal bonds issued by the state of NY and its municipalities are exempt from NY and NYC income taxes. However, interest received on bonds issued by other states and local governments are subject to NY and NYC income taxes.¹

Betterment’s standard portfolio for taxable accounts utilizes MUB, a bond ETF that provides exposure to municipal bonds across many states. We also offer an ETF that invests solely in New York municipal bonds—for New York residents with a minimum balance (or an intent to fund)—of at least $100,000. If you want to switch out MUB in your portfolio to NYF, please email us. We generally recommend making this switch before you fund your account, if possible.

To help make tax time even easier for our customers who invest, we’ve introduced a new supplemental tax statement which provides a breakdown of U.S. Government interest and in-state vs. out-of-state municipal bond interest.

Here are some fun tax facts to tell your fellow New Yorkers.

  • Sales tax can be funny sometimes. For example, NY does not tax unprepared food like a whole bagel, but one that is sliced for you is taxed. As an avid consumer of poppy seed bagels lathered in cream cheese, this tax is pretty unavoidable for me.
  • Until 1999, NYC income tax applied to commuters working within NYC. However, there was a court ruling which stated that NYC could not exempt NY commuters from the tax and impose it on only NJ and CT commuters. Consequently, the NYC commuter tax was ultimately repealed for all commuters. Unfortunately, another version of a NYC commuter tax called “congestion pricing” will be implemented for drivers who enter the southern part of Manhattan, starting in 2021.
  • You’ll probably never guess what I think about on my daily commute as I traverse the Hudson river on the PATH train to get to the Betterment office. Ok, you’re right–I’m always thinking about how taxes can apply to my current situation. I previously mentioned that NY generally taxes interest on bonds issued from outside of NY. What about bonds issued by the Port Authority of NY and NJ? There is no state or local tax on interest earned from their bonds for both NY and NJ residents.

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Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

¹ The only exception to this “out of state rule” are for bonds issued by governments who have an exemption per federal law. Examples include Puerto Rico and Guam. Note that Betterment is currently available to residents in Puerto Rico and the Virgin Islands, but we currently do not support residents in Guam.

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