Trusts and Estates Law | Calculation of New York Non-Resident Estate Tax Notice to Trusts and Estates Section Members

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Calculation of New York Non-Resident Estate Tax Notice to Trusts and Estates Section Members

Report by Philip L.Burke

As you may know, because of the changes to the calculation of the State Death Tax Credit under The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") the amount of the New York Non-Resident tax payable has, under some circumstances, actually exceeded the value of the taxable New York property.

By way of background, as of February 1, 2000 New York has been a "SOP" tax state, collecting its estate tax in an amount equal to the State Death Tax Credit available under Section 2011 of the Internal Revenue Code. However, EGTRRA reduced the amount of the state death tax credit available (by 25% in 2002, 50% in 2003, 75% in 2004) and changes the credit to a deduction starting in 2005. New York has not conformed to these changes and still calculates the amount of the state death tax credit under the "old" pre-EGTRRA tables.

With regard to the non-resident New York tax, this is imposed under Section 960 of the New York Tax Law. Section 960 taxes the transfer of real and/or tangible property located in New York which is owned by a non-resident of the state. Generally speaking, the tax is calculated as if the non-resident was a resident (resulting in a tax equal to the state death tax credit calculated under the pre-EGTRRA tables). The amount of this tax is subject to being reduced according to the provisions of Section 952 of the Tax Law. Section 952 requires that the tax calculated under Section 960 be reduced by "the lesser of" (a) the amount of the tax paid to the actual state of domicile of the non-resident or, (b) a proportional amount that the taxable New York property bears to the overall tax (i.e. a pro-rata allocation of the total tax between the state of domicile and New York). Since the amount of the state death tax credit is now being reduced as required under EGTRRA (a 50% reduction this year, 75% next year, etc.) the amount of tax being paid to the state of domicile is reduced which, in turn, reduces the deduction or offset against the New York non-resident tax.

As a result of the interplay between the reduced amount of the state death tax credit and the calculation of the non-resident New York estate tax, some taxpayers find themselves in the anomalous situation of paying a New York non-resident tax in an amount greater than the value of the property located in New York which is subject to the tax.

Representatives of the Trusts and Estate Section of the New York State Bar Association (the "Section") have been in contact with representatives of the New York State Department of Taxation and Finance ("DTF") to discuss this and to try and determine how best to deal with this situation. As a result of these and other discussions with DTF, the Section has been advised that DTF is considering amending the instructions for the calculation of the non-resident New York estate tax so that the "old pre-EGTRRA" state death tax credit tables are used in determining the amount of the reduction of the non-resident tax under Section 952. In other words, in calculating the reduction, the amount of the state death tax credit will not be subject to the 50% reduction for 2003, the 75% reduction for 2004, etc. It has not yet been determined how the 2005 change from a credit to a deduction will affect this calculation. Please note, however, that DTF has stressed that this is currently a proposal which is being considered by DTF and, if implemented, would probably not take place until after the 1st of the year (2004). In the interim, DTF representatives have stated to Section representatives that current non-resident tax calculations should be made using the pre-EGTRRA state death tax credit tables (i.e. without any reduction under EGTRRA) and that returns should be filed in this manner. Any adjustments in this position would be addressed by DTF in audit, if necessary.

The Section is also currently reviewing this problem from a legislative perspective and hopes to have proposed legislation to the State Legislature in the near future.