A tax increase for those who make over $1 million. But there are ways to reduce the impact.
- Massachusetts residents making over $1 million will now see that income taxed at 4%.
- Massachusetts has one of the highest income tax rates in the country.
- The law continues to have many legal challenges and updates, so it has many uncertainties.
- If you understand how, there are ways to minimize the effect of the new tax.
Since November 2022, Massachusetts’ high-income residents, those making over $1 million a year have been subject to the newly implemented millionaire’s tax. This tax, approved by voters, affects around 0.6% of the households in the state. As Massachusetts navigates this change, similar taxation models are being contemplated in other states, potentially influencing a significant portion of the nation’s wealth.
This article will help high-net-worth investors understand this tax’s potential impact and possible solutions.
Effect on high-net-worth individuals
An individual who makes over $1 million will owe an additional 4% on earned revenue and 9% on capital gains, factoring in the 5% flat tax. Luckily, there are several options out there to minimize the impact of this new tax.
- Spread around income. The Mass Millionaires tax applies per individual tax return, not per household. Married couples can file separately in Massachusetts to keep individual incomes below the $1 million threshold, avoiding the tax, while still filing jointly for federal taxes. Additionally, spreading income over time, such as when selling property or a business, or through a charitable remainder trust, can keep annual income under $1 million, thereby dodging the additional tax.
- Leave Massachusetts. You must live in the state to be subject to the tax. Some residents may choose to live elsewhere, changing their domicile to another state. As long as an individual spends less than 183 days in the state every year, he or she won’t be responsible for the tax.
- Make tax-efficient estate plans. Trusts, including revocable grantor and irrevocable trusts, are essential in estate planning. With a revocable grantor trust, taxes are consistent as income is reported on tax returns. For irrevocable trusts, taxes are due if linked to a Massachusetts decedent or initiated by a resident, and there’s at least one trustee from Massachusetts. Income can be distributed among multiple beneficiaries to reduce individual tax burdens. An alternative is an irrevocable incomplete gift non-grantor (ING) trust, which is not subject to Massachusetts tax.
Are there any exemptions and deductions?
The tax applies to both ordinary income and long-term capital gains. There are a few exemptions and deductions that may apply to the Massachusetts Millionaire’s Tax. These include:
- Charitable deductions: Massachusetts allows taxpayers to deduct charitable contributions from their taxable income. This deduction can be used to reduce the amount of income subject to the Millionaire’s Tax.
- Qualified distributions from retirement accounts: Qualified distributions from retirement accounts, such as 401(k)s and IRAs, are not subject to the Millionaire’s Tax. This means taxpayers can withdraw money from their retirement accounts without paying the surcharge.
- Business income: Business income that is taxed at the pass-through entity level is not subject to the Millionaire’s Tax. This means that owners of pass-through entities, such as sole proprietorships, partnerships, and S corporations, can avoid paying the surcharge on their business income.
- Nonresident income: Nonresident income is not subject to the Massachusetts Millionaire’s Tax. This means taxpayers living outside of Massachusetts but with income from sources within the state will not have to pay the surcharge on that income.
In addition to the above exemptions and deductions, there are a few other ways to reduce the impact of the Massachusetts Millionaire’s Tax. For example, taxpayers can:
- Donate appreciated assets to charity: Donating appreciated assets to charity can help taxpayers reduce their taxable income and avoid paying capital gains taxes on the donation.
- Bundle charitable contributions: Taxpayers can bundle their contributions over multiple years to reduce the impact of the Millionaire’s Tax in any given year.
- Move to a lower-tax state: As mentioned before, taxpayers subject to the Massachusetts Millionaire’s Tax may want to consider moving to a lower-tax state. This is a drastic measure, but it may be worth considering for taxpayers facing a significant tax burden.
The Massachusetts Millionaire’s Tax is a complex law, and many other factors may affect how it applies to individual taxpayers. (Yes, we can help you immensely with that.
Planning for the future
The tax could have a negative impact on wealth accumulation for high-income earners in Massachusetts. The tax will reduce the amount of money that high-income earners have to invest and save. It could also lead to some high-income earners leaving Massachusetts to live in other states with lower taxes.
The outcome of any changes to the law will depend on several factors, including the political climate in Massachusetts, the state’s budget needs, and the results of the legal challenges to the tax.
Every person’s financial situation is different, so be sure to consult a financial advisor who thoroughly understands wealthy individuals’ unique situations. And can be trusted to guide wealthy individuals through these and other potential impacts of this tax. Lindberg & Ripple is known for its deep wealth management knowledge for individuals like yourself. Email or call today to get started.
This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. To determine what is appropriate for you, please contact your Financial Professional. Information obtained from third-party sources are believed to be reliable but not guaranteed.
The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that Lindberg & Ripple is not engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Lindberg & Ripple does not replace those advisors.
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