JR Smith will be an Unrestricted Free Agent. JR Smith has been a Knick for 2 years. Since Knicks are over the cap, they can only sign Smith with a salary cap exception. The best one for the Knicks to use is the "Early Bird exception", as explained below:
EARLY BIRD EXCEPTION -- This is a weaker form of the Larry Bird exception. It also allows teams to exceed the cap to re-sign their own free agents, but with more limited contracts than the Larry Bird exception. To qualify for this exception the player must play for two seasons without clearing waivers or changing teams as a free agent (see question number 32 for details and nuances to this rule). A team may use the Early Bird exception to re-sign its own free agent for up to 175% of his salary in the previous season2 (not over the maximum salary, of course) or 104.5% of the average salary in the previous season, whichever is greater (see question number 31 for the definition of "average salary"). Early Bird contracts must be at least two seasons in length, which prevents teams from using the Early Bird to sign a one-year contract, then signing the same player with the full Larry Bird exception the following season. Early Bird contracts can be up to four years in length, with raises up to 7.5% of the salary in the first season of the contract.
So the Knicks can pay JR Smith basically an MLE contract. That's the most they can pay him. Will JR Smith accept this or try to get more somewhere else? I believe JR will remain a Knick and accept the MLE contract. I also have trouble seeing another team "taking a chance" on giving JR a huge contract, because of his history.