Timely tax planning will help avoid or minimize Massachusetts ‘millionaire tax’

James J. DeLuca, CPA, MST
Senior Tax Manager

The Massachusetts “millionaire tax” takes effect for the current tax year, and taxpayers who expect to be impacted have several strategies available to avoid or minimize it. But careful tax planning – starting now – is essential. This is not the year to leave tax planning till the last minute.  MA millionaire tax

Massachusetts voters approved the so-called millionaire tax at the polls last November, amending the state constitution, which for more than a century had mandated that state income taxes be applied uniformly – meaning at a flat rate – to all taxpayers regardless of income. Hence, the state’s flat 5% income tax was applicable to bus drivers and hedge fund managers alike.

The measure that voters ratified authorizes an additional 4% surcharge tax on income over $1 million on a single tax return. In other words, the first $1 million of income is taxed at the state’s regular 5% rate, and any income over $1 million is taxed at 9%. 

The new tax is expected to impact about 16,000 Massachusetts taxpayers, or roughly 0.6% of the commonwealth’s households, and raise an additional $2.1 billion in revenue for 2023.

The law does not distinguish among different kinds of income, so a taxpayer who receives one-time income from selling a business or property could be subject to the millionaire tax for the affected year unless they engage in some careful tax planning.

How the Massachusetts millionaire tax plays out

Taxable Income         Tax Rate(s)                        Actual Tax          Total Tax        Blended Tax Rate

$1,000,000                  5%                                          $50,000              $50,000            5%

$1,375,000                  5% on first $1,000,000         $50,000
                                      9% on next $375,000           $33,750              $83,750             6%

$2,250,000                  5% on first $1,000,000         $50,000
                                      9% on next $2,250,000        $112,500            $162,500           7.2%

Avoid or minimize the millionaire tax

If you think you will be subject to the millionaire tax, here are some strategies to consider. Please speak with your GT Reilly tax advisor before making any moves.

The new law specifically applies to the income reported on a single tax return, as opposed to household income. Therefore, a married couple filing jointly with $1.5 million in income could file separately, splitting the income between two state tax returns and pushing both below the million-dollar threshold. Couples who do this are still able to file joint federal tax returns. Beware, though, that a measure is under consideration on Beacon Hill that would prevent married couples from filing separate state tax returns if they file joint federal returns. We will follow this issue and keep you informed.

Taxpayers who receive one-time income from the sale of a business or property may be able to structure the deal so smaller payouts are spread over several years to eliminate or minimize the millionaire tax. Placing assets from the sale in a trust and paying out from the trust over several years is another option.

There is also the option of moving out of state, but changing tax domicile can be tricky so you should speak with your tax advisor before considering this option. Moreover, at least eight other states are considering their own versions of the millionaire tax, though the favored tax havens of Florida, Texas and Nevada are not among them.

Just in time for the millionaire tax, Massachusetts has revived its state-level charitable giving tax deduction, giving taxpayers another strategy for avoiding or minimizing the tax while doing good at the same time.

Contact your GT Reilly advisor to discuss your options for avoiding or minimizing the impact of the Massachusetts millionaire tax.

Author

James J. DeLuca, CPA, MST

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