MA voters have approved the Millionaires Tax…what does that mean for you? We explore here.

What is the “Millionaires Tax”?

Through a constitutional amendment effective January 1, 2023, known as the Fair Share Amendment, the tax rate on MA residents with income over $1,000,000 will now include an additional 4% surcharge. For taxpayers reporting more than $1,000,000 in MA taxable income (indexed for inflation each year) this means ordinary income and long term capital gains will be taxed at 9%, while short term capital gains will be taxed at 16%.

For context, there are only nine other states plus DC that also tax their highest earners at or above 9%. Tax revenue from this amendment is required to be used for Massachusetts public education, including colleges and universities, as well as public road maintenance and repairs. It is unclear how these funds will be overseen, including which projects are deemed appropriate for their use.

According to the Massachusetts Budget and Policy Center, the change is estimated to impact less than one percent of all MA taxpayers and raise anywhere from $1.3 to $2.7 billion of additional tax revenue per year.

What can be done to mitigate the impact of the Millionaires Tax?

• Focus on accelerating income to 2022 and deferring business deductions to 2023.
  • Can you negotiate the early payment of 2023 bonus payments into 2022? Push up the closing of capital gain transactions (like the sale of your home) to 2022. Focus on collections of A/R balances for your business in 2022. Delay the payment of business invoices until January 2023.

• Can spouses file separately to get their own $1,000,000 threshold?
  • The wording of the amendment leads us to believe that the $1,000,000 threshold is applied on a per tax return basis. That would mean that spouses using the status “married filing separately” would each get their own exemption. We expect the MA DOR will release a TIR to clarify the ability of spouses to file separately to get their own threshold. If this planning opportunity holds up, consider re-titling income producing assets to split the taxable income more evenly between spouses. Be sure to understand how this status change could impact other areas of your tax return before committing to this strategy.

• Does the MA Pass-Through Entity (PTE) Tax Election apply to your business?
  • For taxpayers with a Schedule C trade or business or pass-through entity not currently utilizing the MA PTE election, consider adjusting your business structure to take advantage of this election. Although this will not reduce your MA taxable income, it will reduce your federal income and therefore save you tax at the Federal level to help offset the increased MA tax.

• Increase your charitable contributions?
  • Massachusetts is scheduled to allow a charitable deduction once again in 2023, a deduction that has been suspended since 2002. If you’re planning on making any large charitable donations, consider waiting until 2023 or later to take advantage of the reinstated MA deduction and reduce MA taxable income.

• Limit short term capital gains
  • Short term capital gains will now be taxed at 16% for those subject to the MA Millionaires Tax. Hold assets longer than one year to avoid that 16% bracket when you expect your income will be over $1M.

• Dust off your estate plan
  • There is an open question as to whether non-grantor trusts are subject to the Millionaires tax. If the tax does not apply, it could make sense to do some early estate planning and shift assets into trusts sooner rather than later. On the other hand, if non-grantor trusts are subject to the additional tax, consider splitting trusts according to different beneficiaries rather than creating larger trusts with multiple beneficiaries. Trustees can also consider utilizing distributions in years that trust income is approaching the threshold and should review trust language for this option while we await additional guidance.
  • Consider setting up an Incomplete Non-Grantor Trust (ING). This strategy can be particularly useful if there is an expectation of a significant transaction in the future and the asset can be transferred before an intent to sell is in place. The ING would be domiciled in a tax friendly state like Delaware or Nevada and income in the trust could avoid being taxed in MA. The ING is non-grantor for income tax purposes but transfers made to it are incomplete for gift tax purposes, so the lifetime estate tax exemption is not used.
    
    
• If all else fails…move out of Massachusetts
  • Many believe that high income taxpayers will flee the state to avoid the additional tax burden. Before you go running to the Nevada desert to avoid income and estate taxes, you should understand the complexities of changing your domicile and understand that it must be rooted in a lifestyle change for the entire family. We can expect that the MA DOR will be more aggressive in their audits of those changing their residency.
  • This also means that if you are a MA nonresident that spends a significant amount of time in the state, especially if you own property here and have family ties, you will want to be aware of the ways that MA can claim you are a resident and tax you like one. If you do not want to be included as a MA resident, read up on the ways that MA has tripped up taxpayers in the past and stay compliant with residency rules.

What are the current “unknowns” of the Millionaires Tax?

As of the date of this publication and as noted above, there are still some unknowns about the execution of the Millionaires tax for the 2023 tax year. Here are just a few areas that require additional guidance from the state:

• Will nonresidents with MA source income over $1,000,000 be subject to this tax?
• Does this threshold vary at all between filing status? For example, is the $1,000,000 threshold for a Single taxpayer also applicable to Married Filing Joint taxpayers?
• Will Non-Grantor trusts be subject to the Millionaires Tax?
• Will the MA charitable deduction be applicable for 2023?

Stay tuned for updates as MA issues additional guidance on the Millionaires Tax. We can help to review your residency status and develop income tax planning and estate tax strategies to minimize tax.

Questions? We can help.