Massachusetts Millionaires Tax
In November 2022, Massachusetts voters approved a new “Millionaires Tax,” which imposes a 4% surtax on annual taxable income above $1 million. This surtax is in addition to the existing 5% flat income tax. For example, if a taxpayer has taxable income of $2 million, the first $1 million is taxed at 5% ($50,000) and the second $1 million is taxed at 9% ($90,000), for a total tax of $140,000.
The surtax is effective for tax years beginning in 2023 and the $1 million threshold is adjusted annually for inflation. The $1 million threshold applies to each income tax return, whether for an individual or a married couple filing jointly. Taxable income includes regular sources of income such as salary, wages, investment income and retirement withdrawals, as well as one-time tax events such as capital gains on the sale of a home or business. Thus, some wealthy taxpayers will be subject to the surtax on a regular basis, while others may be affected only in years with a big income generating event.
At Bob Goldman Law LLP, we are working with our clients (in collaboration with their accountants and other tax advisors) to minimize the impact of this tax to the extent possible. Some potential planning ideas include:
1. For married couples, filing separately for Massachusetts purposes, rather than filing a joint return, so that each spouse can take advantage of the $1 million threshold.
2. Moving to another state. Note that this strategy will not avoid taxation on Massachusetts-source income, like compensation for personal services performed in Massachusetts, rental income on Massachusetts real estate, or capital gains from the sale of a Massachusetts home. For most taxpayers, this is a dramatic step, but may be attractive for those with strong ties to other states, especially states like Florida and New Hampshire that do not have state income tax or estate tax.
3. Spreading income across multiple years if possible. For example, a sale of a business may be structured on the installment method, or sales of investments might be staggered over multiple years to stay under the threshold.
4. In certain situations, making gifts of property prior to its sale, so that the income will be reported by the recipient rather than the donor. These gifts may be made to individuals, certain trusts, or charitable organizations. Stay tuned for a future post on the benefits of giving appreciated property to charitable organizations, including donor advised funds.
5. For existing trusts, considering “non-grantor trust” status, which would make the trust its own taxpayer with its own $1 million threshold. This benefit must be weighed against the estate planning benefits of grantor trust status, which we will discuss in more detail in a later post.
If you have questions or would like to discuss further, please contact us and we can work with you to find a strategy that fits your specific situation.
Bob Goldman, Managing Partner
Liz Drake, Partner
Jill Weiner, Senior Attorney
Frank Hannigan, Associate Attorney