Massachusetts voters have approved a ballot initiative known as the "Millionaires Tax." It amends the Massachusetts Constitution to impose an additional 4% tax on annual taxable income in excess of $1,000,000 reported on any income tax return. This means that the rate applicable to compensation and long-term capital gains in 2023 will be 5% for taxable income up to $1,000,000, and 9% for the portion of taxable income over that amount. The income of a nonresident will be subject to the new tax rate to the extent the nonresident has taxable income in excess of $1,000,000 that is deemed to be derived from sources within Massachusetts. The new tax rate is effective for tax years beginning on or after January 1, 2023 and is adjusted annually for inflation.
Many Massachusetts taxpayers are considering strategies to mitigate the effect of the higher tax rate, including the following:
- Income Acceleration into 2022: The 4% surtax does not go into effect until January 1, 2023, so a taxpayer anticipating income soon may want to realize that income in 2022 rather than 2023, if possible. For instance, the sale of a business may be subject to less tax if completed in 2022.
- Spreading Income Among Multiple Taxpayers: Since the amendment refers to income reported on a tax return, it may be beneficial to spread income across the returns of multiple taxpayers.
- Spreading Income Across Multiple Years: Careful planning realize taxable income across multiple tax years can reduce overall tax paid.
- Transfers of Assets to Nonresident Trusts: In general, if a Massachusetts resident transfers assets to a non-grantor trust that is not a Massachusetts resident, then trust income not derived from Massachusetts sources is not subject to tax in Massachusetts.
- Change of Personal Domicile and Residence: Another possibility is for a Massachusetts taxpayer to move out of state so that he or she is no longer domiciled in Massachusetts nor a resident of Massachusetts, and is therefore taxable in Massachusetts only on Massachusetts source income.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
