MA Millionaires Tax: Strategies to Consider

Posted by Brian Shoer on May 31, 2024 10:15:00 AM
Brian Shoer
Find me on:

In recent years, the debate surrounding wealth inequality and tax reform has gained significant traction across the US. Among the states at the forefront of this conversation is Massachusetts, where the “Millionaires Tax” has sparked both support and opposition. In November of 2022, Massachusetts approved the Fair Share Amendment, a 4% tax on state residents with an annual income of greater than $1 million.

Appropriately nicknamed the “Millionaires Tax”, these funds are earmarked for education and transportation initiatives in the state. Combined with the state’s existing tax rate, it raises the top tax rate to 9% and applies to earned income, interest, dividends and capital gains. While the tax primarily impacts high earners, it can also affect residents who realize high income through the sale of a business or property.

In the past, couples could utilize a loophole to keep their family income below the $1 threshold, filing their federal taxes jointly and choosing to file separately for their state return. However, as of January 1, 2024, Massachusetts now requires uniformity in filing status for federal and state returns.

For Massachusetts residents concerned about the potential impacts of the Millionaires Tax, there are several strategies to consider:

  1. Income Diversification
    When selling assets, consider spreading out the payments into installments over several years. Another option is to transfer the assets to be sold into a charitable remainder trust, which pays out the proceeds over a maximum term of 20 years or your lifetime. The same concept applies to multiple assets within your portfolio. Staggering the sale of portfolio assets over multiple calendar years could lead to tax savings.

  2. Irrevocable Trusts
    Trusts are a key element in estate planning, and irrevocable trusts can be used to help minimize tax obligations. For existing irrevocable trusts with multiple beneficiaries, income can be spread out, with each beneficiary having a separate trust and filing a separate income tax return. For new irrevocable trusts, a taxpayer can create an irrevocable incomplete gift, non-grantor (ING) trust to avoid the MA Millionaire’s tax. As long as the ING trust does not have trustees who are Massachusetts residents, and the grantor only has limited rights over the principal and income of the trust, it is not taxable in the state of Massachusetts.

  3. Charitable Giving
    Starting in 2023, Massachusetts will restore charitable deductions against taxable income. Consider charitable contributions and philanthropic endeavors, which may offer tax benefits while supporting causes aligned with your values. Additionally, it may be beneficial to consider a Charitable Remainder Trust (CRT). Funded with appreciated property, any assets can be sold and reinvested without paying any capital gains or other income tax, and you will receive a partial deduction equal to the present value of the assets transferred into the trust. The donor will receive an income stream on an ongoing basis from the Trust property. A donor-advised fund is another charitable vehicle worth considering.

  4. Change in Residency
    Evaluate the possibility of moving your primary residence to a low-tax state to avoid the 4% surcharge and other Massachusetts taxes. Changing your domicile can be a complex issue – your tax advisor can help you navigate this. You can also postpone the realization of capital gain – and therefore the Massachusetts income tax and Millionaires tax – by exchanging it for other income-producing property through a 1031 exchange.

These strategies may soon be helpful for residents of other states – including California, Connecticut, Hawaii, Illinois, Maryland, New York, Oregon, and Washington, as they propose similar tax regulations.

Some of these strategies are complex – your CPA can assist you in implementing the strategies that work best for your unique situation. If you have questions about the Massachusetts Millionaire’s Tax, leave a comment below, or feel free to contact me directly. I’m happy to help.

Topics: Tax, Estate Planning