A First Look at the Tax Provisions of the New York State 2025–2026 Budget

‘Inflation Refund’ Credit

As announced by Governor Hochul, the Budget Act provides for a new, one-time “inflation refund” credit, calculated as illustrated in Exhibit 1.

To be eligible for this inflation refund, taxpayers must have filed a full year resident return for tax year 2023. Nonresident taxpayers, part-year resident taxpayers, and those who did not file a return for tax year 2023 are not eligible to receive the inflation refund (Budget Act, Part A).

The amount of the credit shall be treated as an overpayment of tax to be credited or refunded, but no interest is paid on the amount. The inflation refund credit, to the extent it may be includible in gross income for federal income tax purposes, is not subject to New York State or local income tax.

For eligible taxpayers, the Commissioner of the Department of Taxation and Finance will advance the payment amount specified above. A taxpayer who failed to receive an advance payment that they believe was due, or who received an advance payment that they believe is less than the amount that was due, may request payment of the claimed deficiency in a manner to be prescribed by the Commissioner.

Mailing of the inflation refund checks started on September 26, 2025, and will continue through the end of November 2025. There is no specific schedule for the mailing of the checks, and some taxpayers will receive their checks after their neighbors.

Providing a Middle-Class Tax Cut and Extending the Temporary Personal Income Tax High Income Surcharge

Effective for tax years beginning in 2026, the lower brackets will be reduced slightly. The first five tax brackets were cut by 0.2 percentage points over two years, benefiting joint filers earning up to $323,200.

The Budget Act extended New York State’s temporary high-income surcharge for five more years. This personal income tax surcharge applies to personal income tax and was originally set to phase out after 2027, but it will now continue through 2032. The surcharge primarily affects high earners, including those making $25 million or more, who will continue to face a 10.9% tax rate (Budget Act, Part B). The upper tax brackets of 9.65%, 10.3%, and 10.9% will remain unchanged for 2026.

New York City Personal Income Tax Eliminated for Certain Filers

Beginning on or after January 1, 2025, the Budget Act enacts a credit against the New York City personal income tax for certain New York City residents. To be eligible for this credit a taxpayer must meet the following requirements:

• the taxpayer claims one dependent on the federal return;
• the taxpayer must have an income below the threshold level;
• the taxpayer must not receive a NY State or City pass-through entity tax (PTET) credit;
• the taxpayer must not have any disqualified income under $10,000; and
• the taxpayer is not filing as “married filing separately” on federal returns (Budget Act, Part W).

If income exceeds the threshold, partial credit is available based on a formula.

The threshold amounts for taxpayers who filed a New York City resident income tax return as married taxpayers filing jointly or a qualified surviving spouse are as follows:

The threshold amounts for taxpayers who filed a New York City resident income tax return as a single taxpayer, married taxpayer filing a separate return, or head of household are as follows:

Starting with taxable years beginning on or after January 1,2026, the above thresholds will be increased by an amount computed as follows:

A percentage equal to one plus the percentage by which the consumer price index for the preceding calendar year exceeds the consumer price index for 2024.

This change should benefit low-income taxpayers, as they will effectively no longer be subject to the New York City personal income tax.

Estate Tax

The Budget Act makes permanent the estate tax three-year gift addback rule. It extends the requirement that gifts that are taxable under federal rules, and are made within three years of death through 2032, are to be included in the decedent’s New York gross estate (Budget Act, Part T).

Corporate Taxation

Effective for tax years beginning on or after January 1, 2026, the Budget Act raises the threshold for mandatory first estimated tax payments for corporate taxpayers under Article 9-A from $1,000 to $5,000, as well as quarterly payments, if the corporation’s current year’s tax is expected to exceed $5,000. This increase also applies to the tax surcharge under Article 9-B (Budget Act, Part R).

Currently, corporations must make a first installment payment if their previous year’s tax exceeded $1,000, and quarterly payments if their current year’s tax is expected to exceed $1,000. This low threshold burdens small businesses. It remains to be seen how the new $5,000 threshold will impact them.

Metropolitan Commuter Transportation Tax

Effective July 1, 2025, the Metropolitan Commuter Transportation Tax (MCTD) shall be divided into two zones:

• MCTD zone 1, including the counties of Bronx, Kings, New York, Queens, and Richmond.
• MCTD zone 2, including the counties of Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester (Budget Act, Part VV).

A new quarterly MCTD payroll tax is imposed, with different rates for each zone.

Zone 1 rates (other than individuals):

• 0.055% for payroll of $312,500–$375,000;
• 0.115% for payroll of $375,000–$437,500;
• 0.60% for payroll of $437,500–$2.5 million; and
• 0.895% for payroll greater than $2.5 million (0.60% for local government employers).

Zone 2 rates (other than individuals):

• 0.055% for payroll of $312,500–$375,000;
• 0.115% for payroll of $375,000–$437,500;
• 0.34% for payroll of $437,500–$2.5 million; and
• 0.635% for payroll of $2.5 million (0% for local government employers).

The rates for individual taxpayers are as follows:

• Zone 1—0.060% of the net earnings from self-employment of individuals attributable to MCTD if such earnings exceed $150,000 (previously $50,000) for the tax year.
• Zone 2—0.034% of the net earnings from self-employment of individuals attributable to MCTD if such earnings exceed $150,000 (previously $50,000) for the tax year.

Tax Incentives and Credits

The Budget Act (Part D) doubles the annual increase of the Low-Income Housing Tax Credit (LIHC), from $15 million to $30 million for 2025–2029. Refunded bonds can be paired with the LIHC at a 9% rate, matching certain federal low-income housing tax credits.

The Budget Act (Part C) extends the Empire State Child Credit from 2025 to 2027 and expands its eligibility and increases the credit amounts. For each qualifying child under age 4, the refundable credit will be $1,000 from 2025 to 2027. For each qualifying child age 4–7, it will rise from $330 in 2025 to $500 in 2026 and 2027.

The income eligibility thresholds are $110,000 for taxpayers married-filing jointly, $75,000 for head of household, and $55,000 for single or married filing separately taxpayers. The credit is reduced $16.50 (but not below zero) for each $1,000 that the taxpayer’s federal AGI exceeds these income thresholds.

The Budget Act (Part H) extends the Excelsior Jobs Program from 2029 to 2039; it also enhances benefits for semiconductor supply chain businesses.

The Budget Act (Part K) amends the Digital Gaming Media Production Credit Program so that any unused credit for a given year will be carried over to future years. It also extends the New York City Musical and Theatrical Production Credit through December 31, 2027, and increases the available credit by $100 million (Budget Act, Part L). For regions outside of New York City, the Musical and Theatrical Production Credit is extended for three years through January 1, 2030 (Budget Act, Part DD).

Budget Act (Part Y) extends the Clean Heating Fuel Tax Credit for three years, through January 1, 2029. Likewise, it extends the Alternative Fuels and Electric Vehicle Recharging Property Tax Credit for three years, through January1, 2028 (Part Z).

The Budget Act (Part BB) extends the Workers with Disabilities tax credit for three years, through January 1, 2029. The Hire a Veteran tax credit has likewise been extended through January 1, 2029 (Part CC).

Organ Transplant Credit

For taxable years beginning on or after January 1,2025, a full-year resident taxpayer who, while living, donates one or more of their human organs to another human being for human organ transplantation will be allowed a credit on their personal income tax. A human organ refers to all or part of a liver, pancreas, kidney, intestine, lung, or bone marrow. A taxpayer may claim the credit allowed under this subsection only once and only in the taxable year in which the transplantation occurs.

The qualifying unreimbursed expenses incurred by the taxpayer and related to the organ donation include travel expenses, lodging expenses, and lost wages. The credit may be claimed for up to $10,000. It does not apply to any organ donation for which the taxpayer has received benefits under § 4371 of the public health law. If the amount of the credit exceeds the tax owed, the excess is treated as an overpayment of tax to be credited or refunded.

Administrative Provisions

The Budget Act (Part V) introduces new reporting requirements for federal partnership audit changes and administrative adjustments with respect to both New York State and City. Currently, individual or corporate taxpayers must report federal changes or corrections, including those stemming from a federal audit of a partnership in which they hold an interest. But because the IRS treats partnership adjustments as tax additions, payable by the partnership on behalf of its partners, it is not clear whether and when partners must report such adjustments. The Budget Act requires that partnerships report and pay on behalf of the partners within 180 days after the final determination date. Whether this will simplify the reporting of federal audit changes to New York and the partners individually is yet to be determined.

The Budget Act (Part N) permits the filing of warrants with the Department of State sufficient to establish New York State’s liens on the taxpayer’s property in New York. The Tax Department must continue to submit copies to the county clerks.

The Budget Act (Part EE) extends the financial institution data match system for state tax collection purposes for four years, through April 1, 2030.

Federal Caveat

Tax preparers must keep in mind that, with the passage of H.R. 1, the One Big Beautiful Bill Act (OBBBA), the computation of New York adjusted gross income, as well as itemized deductions, will differ more than ever from their federal counterparts. Many observers hope that both the IRS and the New York State Department of Taxation and Finance will issue guidance in time for the upcoming filing season.