On May 9, 2025, following a lengthy delay, New York Gov. Kathy Hochul signed tax legislation associated with the state’s FY25-26 budget.1 This long-awaited legislation introduces numerous changes to New York tax law, with a primary focus on income tax relief for lower and middle-income individuals. The relief includes reduced individual income tax rates as well as an inflation refund credit and increased childcare credit. However, the existing temporary higher tax rates imposed on high-income individuals have been extended. For estate tax purposes, the three-year clawback for gifts made by a decedent has been extended through 2031. The legislation raises the estimated tax filing threshold and introduces various new tax credits for both businesses and individuals. Additionally, the Metropolitan Commuter Transportation Mobility Tax (MCTMT) on payroll is amended by reducing the rates for smaller employers and increasing the rates for larger employers. Finally, the legislation imposes new requirements for reporting federal partnership adjustments to New York State and New York City.
Individual income tax
The legislation reduces the individual income tax rates for many taxpayers. For the 2026 tax year, the tax rates for married taxpayers filing jointly and surviving spouses with income not over $323,200 ($269,300 for heads of household and $215,400 for single filers or married filing separate returns) are slightly reduced to a range of 3.9% to 5.9% (previously, the rates ranged from 4% to 6%).2 For the 2027 and subsequent tax years, the rates are further reduced for these income brackets and will range from 3.8% to 5.8%.3 However, the tax rates for high-income individuals that were in effect through the 2027 tax year have been extended through the 2032 tax year.4
Taxpayers who meet certain requirements are allowed an inflation refund credit for the 2025 tax year.5 To be eligible for the credit, the taxpayer (or taxpayers filing joint returns) (i) must have been a full-year resident in the state for the 2023 tax year; (ii) must have had New York adjusted gross income of $300,000 or less in the 2023 tax year for married taxpayers filing jointly or qualified surviving spouses (for taxpayers using other filing methods, $150,000 or less income) and (iii) must not have been claimed as a dependent by another taxpayer in the 2023 tax year.6 Depending on the amount of income and filing status, the credit amount ranges from $150 to $400.7 Also, the Empire state child credit is increased for the 2025-2027 tax years.8
Estate tax
Effective immediately, the estate tax law requiring a three-year clawback for gifts made by a decedent has been extended to people dying before Jan. 1, 2032 (previously, Jan. 1, 2026).9
Corporation franchise tax
For purposes of the corporation franchise tax and Metropolitan Transportation Business Tax surcharge, taxpayers are required to declare estimated tax if their estimated tax can reasonably be expected to exceed $5,000 (previously, $1,000) beginning with the 2026 tax year.10
New credits
For tax years beginning on Jan. 1, 2025 and thereafter, as a means to create financial incentives to attract semiconductor research and development projects to New York, the state has created tax credits that may be taken against corporation franchise and individual income tax for semiconductor research and development11 as well as semiconductor manufacturing workforce training.12 The Excelsior Jobs tax credit also is expanded to include semiconductor supply chain projects.13 An independent film production credit is added for purposes of the corporation franchise and individual income taxes.14 In addition, beginning with the 2025 tax year, residents are allowed a credit against individual income tax for organ donations.15
MCTMT
The legislation includes significant amendments to the MCTMT, commonly referred to as the payroll mobility tax. This tax serves as a dedicated funding source for the metropolitan New York transportation authorities, supporting the maintenance, operation, and enhancement of transit and transportation systems serving New York City and its suburbs. Under prior law, the counties within the Metropolitan Commuter Transportation District (MCTD) were divided into two groups: (i) the five boroughs of New York City (the Bronx, Brooklyn, Manhattan, Queens, and Staten Island) and (ii) the outlying New York suburban counties (Dutchess, Nassau, Orange, Putman, Rockland, Suffolk and Westchester).16 The new legislation formally divides these groups into two zones, termed zone one and zone two, respectively.17 The tax rates imposed on employer payroll expense are changed for tax quarters beginning on July 1, 2025, or thereafter. The rates are reduced for smaller employers, and substantially increased for larger employers with payroll expenses over $2.5 million in any calendar quarter. For employers in zone one, the rates range from 0.055% of payroll expense to 0.895% (previously, the rates ranged from 0.11% to 0.6%).18 For employers in zone two, the rates range from 0.055% to 0.635% (prior to amendment, the rates ranged from 0.11% to 0.34%).19
Beginning with the 2026 tax year, self-employed individuals will be subject to the MCTMT only if their earnings attributable to the MCTD are greater than $150,000 (previously, $50,000) for the tax year.20
Reporting of federal partnership adjustments
In an effort to more closely align New York’s treatment of federal partnership adjustment reporting to the partnership reporting regimes adopted by the Internal Revenue Service (IRS) and many states over the last several years, the legislation enacts a new statute, effective immediately, requiring the reporting of federal partnership adjustments to the state.21 The new statute establishes a comprehensive reporting regime for partnerships that experience federal tax adjustments affecting their New York State tax liability. Specifically, the statute applies to any partnership for which there is a final federal adjustment, whether arising from a federal partnership-level audit under Internal Revenue Code (IRC) Sec. 6225, a federal election for alternative payment under IRC Sec. 6226, or the filing of an administrative adjustment request pursuant to IRC Sec. 6227.22 Such partnerships are classified under the law as “impacted partnerships.”23
Impacted partnerships are authorized to make a “New York election for alternative payment.”24 This election permits the partnership to remit a calculated payment to the state on behalf of its direct and indirect partners in lieu of requiring each partner to file and pay individually.25 Once made, the election is irrevocable, unless the Commissioner of Taxation and Finance exercises discretion to allow otherwise.26
The statute requires impacted partnerships to report final federal adjustments to the New York Department of Taxation and Finance within 90 days of the final determination date.27 If a New York alternative payment election is made, payment of the calculated amount must be made within 180 days of such date.28 The law allows for extensions of the time to file reports or make payments under specified conditions, particularly for partnerships with significant size or complexity.29
The legislation authorizes the Commissioner to adopt de minimis thresholds below which reporting obligations will not apply.30 It also permits the remittance of estimated tax payments by partnerships during the pendency of federal proceedings, which may serve to mitigate the accrual of interest and may be credited against final state liabilities.31 In the event of a failure by the partnership to comply with the new reporting or payment obligations, the Commissioner is empowered to assess the resulting tax directly against the individual partners.32
Similar reporting requirements also are added to the New York City Administrative Code with respect to both the General Corporation Tax and Unincorporated Business Tax.33 Under these changes, any taxpayer that is a partner in a partnership required to report a change in its federal or New York State taxable income must report its distributive share of such changes to New York City as if the change had been made directly to the taxpayer’s own federal or New York State income.34 Moreover, any taxpayer or partner in a partnership subject to an alternative adjustment action — defined to include a final federal adjustment, a federal election for alternative payment, or the filing of an administrative adjustment request — is required to report such action to New York City within 90 days of its occurrence, regardless of whether such action results in a change to the taxpayer’s New York City tax liability.35
Commentary
The New York budget, which is scheduled to be enacted by April 1 each year, was repeatedly extended following intense negotiations between Governor Hochul and the New York State Assembly. As explained in Governor Hochul’s press release announcing the budget agreement, the legislation is intended to provide tax relief for middle-class New Yorkers.36 Specifically, the legislation lowering the individual tax rates is expected to provide nearly $1 billion in annual tax relief to approximately 8.3 million people in the state. Also, the inflation refund credit is designed to return a total of $2 billion to over 8 million New Yorkers. At the same time, the progressively higher tax rates imposed on high-income taxpayers will remain in effect.
While this year’s budget legislation primarily focused on individual income taxes, some corporation franchise tax relief also was provided through an increase in the estimated tax threshold, and several new credits were enacted that are intended to encourage investment in the state. With that said, the changes to the MCTMT payroll tax also need to be considered. While the rates are reduced for smaller employers, they are substantially increased for larger employers. Some relief is provided for self-employed individuals that would otherwise be subject to the MCTMT by increasing their earnings threshold from $50,000 to $150,000.
Partnerships that received federal adjustments should carefully consider the new state reporting and payment requirements applicable for purposes of both the New York State and City tax regimes. Notably, partnerships may make an alternative payment election that should provide flexibility to partners that no longer have current filing obligations or investment partnerships with changes in partners. These provisions are effective immediately, but relief is provided if there are adjustments to a taxpayer’s federal taxable income or tax liability with a final determination date or administrative adjustment request occurring prior to the May 9, 2025, effective date of the legislation.
1. Ch. 59 (A. 3009 / S. 3009), Laws 2025. This legislation contains numerous tax provisions. This SALT Alert highlights the major provisions but is not intended to cover all the tax amendments.
2. N.Y. Tax Law § 601(a)(1)(B)(vi), (vii), (b)(1)(B)(vi), (vii), (c)(1)(B)(vi), (vii).
3. N.Y. Tax Law § 601(a)(1)(B)(viii), (ix), (b)(1)(B)(viii), (ix), (c)(1)(B)(viii), (ix).
4. There are three tax rate brackets applicable to high-income individuals that will remain in effect. For married taxpayers filing joint returns, for income over $2,155,350 ($1,616,450 for heads of household and $1,077,550 for single filers or married filing separate returns) but not over $5 million, the rate is 9.65%. For income over $5 million but not over $25 million, the rate is 10.3%. For income over $25 million, the rate is 10.9%. After the 2032 tax year, the top is rate is scheduled to be 8.82% for income over $2,155,350 / $1,616,450 / $1,077,550, depending on filing status. The top three tax rate brackets have recapture provisions that require taxpayers to gradually subject all their income to the higher rates through the imposition of a supplemental tax. See N.Y. Tax Law § 601(d)-(d-7).
5. N.Y. Tax Law § 606(qqq).
6. N.Y. Tax Law § 606(qqq)(2).
7. N.Y. Tax Law § 606(qqq)(3).
8. N.Y. Tax Law § 606(c-1).
9. N.Y. Tax Law § 954(a)(3).
10. N.Y. Tax Law §§ 213-a(a); 213-b(a).
11. N.Y. Econ. Dev. Law §§ 359-a–359-h; N.Y. Tax Law §§ 210-B.61; 606(rrr).
12. N.Y. Econ. Dev. Law §§ 501–507; N.Y. Tax Law §§ 210-B.62; 606(sss).
13. N.Y. Econ. Dev. Law §§ 352.25; 353(1)(o); 355.1, .2, .3.
14. N.Y. Tax Law §§ 24(a)(6); 210-B.20-a; 606(gg-1).
15. N.Y. Tax Law § 606(ttt).
16. N.Y. Tax Law § 801.
17. N.Y. Tax Law § 800(a). A new definition is provided for “local government employer.” N.Y. Tax Law § 800(f).
18. N.Y. Tax Law § 801(b), (c). Note that a lower tax rate of 0.6% is provided for local government employers in zone one with payroll expenses over $2.5 million in any calendar quarter.
19. N.Y. Tax Law § 801(a), (d). In zone two, local government employers are exempt from tax.
20. N.Y. Tax Law § 801(a)(2), (3).
21. N.Y. Tax Law § 659-a. Adjustments to a taxpayer’s federal taxable income or tax liability with a final determination date or administrative adjustment request occurring prior to May 9, 2025, must be reported within one year. No interest accrues on adjustments occurring prior to May 9, 2025. A. 3009, Part V, Subpart A, § 13.
22. N.Y. Tax Law § 659-a(a).
23. N.Y. Tax Law § 659-a(b)(6).
24. N.Y. Tax Law § 659-a(b)(8), (d)(3).
25. N.Y. Tax Law § 659-a(d)(3)(B).
26. N.Y. Tax Law § 659-a(d)(6)(A). 27. N.Y. Tax Law § 659-a(d)(2)(A).
28. N.Y. Tax Law § 659-a(d)(3)(B).
29. N.Y. Tax Law § 659-a(h).
30. N.Y. Tax Law § 659-a(e).
31. N.Y. Tax Law § 659-a(f).
32. N.Y. Tax Law § 659-a(d)(7).
33. N.Y.C. Admin. Code §§ 11-501(n)-(q); 11-519(b), (c); 11-601.13-a-13-d; 11-605.3-a-3-d; 11-646(e-1), (e-2), (e-3); 11-655.3-a, 3-b, 3-c.
34. N.Y.C. Admin. Code §§ 11-519(b); 11-605(3-a); 11-646(e-1); 11-655.3-a.
35. N.Y.C. Admin. Code §§ 11-519(c); 11-605(3-b); 11-646(e-2); 11-655.3-b.
36. Press Release, Money In Your Pockets: Governor Hochul Signs New Legislation to Cut Taxes for Middle-Class New Yorkers as Part of FY 2026 State Budget, Office of New York Governor, May 9, 2025.
Contacts:
Howard Polonetsky
Managing Director, Tax
Grant Thornton Advisors LLC
Manhattan, New York
Spiro Dorizas
Director, Tax
Grant Thornton Advisors LLC
Melville, New York
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