Massachusetts Approved “Millionaire’s Tax,” What Happens Now

Posted On: Wednesday, December 28, 2022

The Millionaires Tax has passed, and it means that high-income taxpayers in Massachusetts will pay more.

The Millionaires Tax has passed, and it means that high-income taxpayers in Massachusetts will pay more. Here’s how.

What is the “Millionaires Tax”?

The “Millionaires Tax” is a new tax rate on Massachusetts residents with income over $1,000,000. The Fair Share Amendment was passed by voters in 2023 and enabled this new tax structure by amending the state constitution. Under the new law , ordinary income and long-term capital gains will be taxed at 9 percent, while short-term capital gains will be taxed at 16 percent.

Massachusetts is one of nine states that tax their highest earners at or above 9 percent. Funds derived from this amendment will be used to finance public education and infrastructure projects, including the repair and maintenance of roads. It is uncertain how these funds will be overseen, including which projects are deemed applicable for their use.

The Massachusetts Budget and Policy Center estimates that the change will impact less than one percent of all MA taxpayers, and it is expected to raise from $1.3 to $2.7 billion of additional tax revenue each year.

What measures could be taken to lessen the impact of the Millionaires Tax?

  1. Accelerate your income from 2022 onward, and defer business deductions until 2023. Consider pushing up the closing of capital gain transactions (the sale of your home for example) to 2022. Focus on collections of A/R balances for your business in 2022. Postpone or delay the payment of business invoices until January 2023.
  2. Can spouses file separately to take advantage of their own $1,000,000 inheritance tax threshold? The wording of the amendment suggests that a spouse filing separately can claim their own exemption. This could mean that spouses could split the threshold to reduce taxable income. We expect the Massachusetts Department of Revenue to issue a statement clarifying this ability and its impact on other areas of your tax return.
  3. Does the Massachusetts Pass-Through Entity Tax Election apply to your business? If you are a Massachusetts business owner who is not currently taking advantage of the Massachusetts personal tax exemption on your Schedule C trade or business income or your pass-through entity income, you may want to change your business structure to take advantage of this tax break. Although it will not reduce your Massachusetts taxable income, it will reduce your federal taxable income and save you money at the Federal level. This can help offset the increased tax burden imposed by the elimination of your PTE.
  4. Consider increasing your charitable contributions. Massachusetts is scheduled to reinstate its charitable deduction, which has been suspended since 2002. People who plan to make large charitable donations may wish to wait until 2023 or later to take advantage of the reinstated deduction and reduce their Massachusetts taxable income.
  5. Limit short-term capital gains. For those subject to the Massachusetts Millionaires Tax, short-term capital gains will now be taxed at 16 percent. If you expect your income to exceed $1M, consider holding onto assets longer than one year to avoid that 16 percent bracket.
  6. Revisit your estate plan. If the state’s millionaire’s tax does not apply to non-grantor trusts, consider moving assets into trusts sooner rather than later. On the other hand, if it does not apply to non-grantor trusts, consider splitting trusts according to different beneficiaries rather than creating larger trusts with multiple beneficiaries. Trustees should also consider utilizing distributions in years that trust income is approaching the threshold, and they should review trust language for this option.

What are the current unknowns regarding the Millionaires Tax?

As of the date of this publication, certain aspects of the Millionaires tax remain unclear. The following are just a few areas that require additional guidance from the state:

  • Will nonresidents whose Massachusetts source income exceeds $1,000,000 be subject to this tax?
  • Do thresholds vary at all between filing statuses? For example, is the $1 million threshold for a single taxpayer also applicable to married couples filing jointly?
  • Will non-grantor trusts be subject to the state’s new millionaire’s tax?
  • Will the MA charitable deduction be available for the year 2023?

MA continues to issue guidance on the Millionaires Tax. We can help you determine your residency status, develop income tax planning strategies, and create estate tax strategies to minimize your tax burden.

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