On August 9, 2023, Massachusetts Governor Maura Healey signed the Fiscal Year 2024 state budget, which implements a four percent (4%) surtax on income exceeding $1 million. The surtax is effective for tax years beginning January 1, 2023 and is in addition to the 5% income tax rate already imposed by Massachusetts.
This “Millionaire’s Tax” (or “Fair Share Amendment”) is a result of an amendment to Article 44 of the Massachusetts constitution, which Massachusetts voters approved through a ballot question in the November 2022 election. The funds generated from the tax will be used for education, roads, bridges, and transit.
Individuals subject to this tax will be looking at a combined tax rate of 9% on any income earned in excess of $1 million. This $1 million threshold will be adjusted annually for inflation. Unfortunately, the application of the surtax is widespread, meaning that it applies to earners who regularly exceed the $1 million threshold and also to earners who may have a one-time income event (such as the sale of a business or a home).
Through thoughtful planning, Massachusetts taxpayers may be able to minimize the impact of this surtax moving forward. Below are a few methods to consider.
Business owners may want to consider structuring the sale of their business as an installment sale which would allow for gain to be recognized over a number of years. Alternatively, a business owner could increase the business’s sale price to net the business’s actual value once the surtax is applied.
Clients often use irrevocable trusts to transfer wealth to the next generation while minimizing estate tax. A common method to accomplish this is using an irrevocable grantor trust where the grantor (creator of the trust) continues to pay the income generated on the assets transferred to the trust. This allows the trust assets to continue growing without the burden of paying income tax. Most irrevocable grantor trusts are structured to allow for the grantor status to be “turned off,” which would change the grantor trust to a non-grantor trust.
As a result of the Millionaire’s Tax, clients may want to consider utilizing this strategy to minimize their income tax. Clients subject to significant estate taxes should consider this option carefully, as the estate tax savings benefit of the grantor trust will likely outweigh the cost of the additional Massachusetts surtax.
Relocating to another state can potentially eliminate Massachusetts income tax. The Massachusetts Department of Revenue considers multiple factors when determining whether a taxpayer has officially changed residency, including the number of days the taxpayer resides outside of Massachusetts. Note that a taxpayer may still be subject to income tax if they have Massachusetts-sourced income.
Individuals concerned about the potential impact of the Millionaire’s Tax are encouraged to reach out to their estate planning attorney to discuss ways to minimize the tax moving forward.
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