Massachusetts tax could hit one-off millionaires but advisors keep levy in perspective

A Massachusetts millionaires tax can encompass people who rise above the $1 million earnings threshold only briefly as the result of the sale of a home or business, but financial advisors say most of their clients won’t be affected.

Last November, Massachusetts voters approved a change to the state’s constitution to allow a 4% surtax on income that exceeds $1 million. Combined with the state’s 5% flat tax on income, it amounts to a 9% tax on the portion of income that is in seven figures. The tax went into effect on Jan. 1.

Gov. Maura Healey included $1 billion in expected revenue from the tax to fund some education and transportation spending in the budget she signed last week.

Some taxpayers who may not feel particularly rich can exceed the $1 million threshold through property sales and other events that boost income.

“Most voters didn't realize the millionaires tax included one-time sudden windfalls like the sale of a home,” said Kristin McKenna, president of Darrow Wealth Management in Needham, Massachusetts. “The surtax will impact many of our clients when they sell their home. But it also affects clients who have a windfall from equity compensation.”

Beyond the one-off events that can make someone a temporary millionaire, the effect of the Massachusetts tax is not likely to be widespread. The tax applies to about 0.6% of Massachusetts households in a given year, or about 21,000 taxpayers, according to a Tufts University report.

“Most of the time, it doesn’t affect most of the people I [work] with,” said Chris Chen, wealth strategist at Insight Financial Strategists in Newton. “Eventually, it’s going to affect 10% to 20%.”

Steve Stanganelli, principal at Clear View Wealth Advisors in Amesbury, said he has one client who would be affected. He worked with one client to adjust a Roth conversion strategy last year in anticipation of a high tax bill hitting this year with the millionaire levy in place.

But he said that opponents of the millionaires tax overstated the potential for home sellers having to pay it. He said a home would have to start from a low basis and appreciate substantially. In addition, the state allows the exclusion of some capital gains on a home sale.

“The reality for most people is they are not going to be impacted,” Stanganelli said. "People should reach out to their tax and financial planners prior to signing the closing documents because we can find you ways to mitigate the tax bill."

The tax offers financial planning opportunities for advisors. They include basics like managing portfolios in tax-efficient ways, selling a business in installments and making charitable contributions to lower tax bills. They also might incorporate more involved strategies like the use of trusts.

“It’s likely to be a complex combination of estate planning and income-tax planning,” said Edward Jastrem, chief planning officer at Heritage Financial in Westwood. “I don’t think there’s one universal solution that’s going to be the go-to answer for this. It’s going to be strategies that are customized for each client.”

There also is a unique Massachusetts strategy. The state allows taxpayers who file a joint return at the federal level to file as individuals with the state. That means that a couple who each come near $1 million in income can avoid the tax.

“We’re going to see a lot of talk about Massachusetts taxpayers filing separately at the state level,” said Aletta Tibbetts, founder and principal at Eos Financial Planning in Arlington.

Overall, her clients are taking the millionaires tax in stride and are positive about where the state is allocating the revenue, Tibbetts said.

“The people I work with feel pretty sanguine about the situation,” she said.

Stanganelli has the same attitude. He serves as an at-large member of the Amesbury city council and voted in favor of a resolution supporting the millionaires tax.

“As an elected municipal official, I supported the passage of this tax because of the need for more revenues to fund infrastructure and education at the local level,” Stanganelli said.

But advisors said higher taxes in Massachusetts may cause some high-net-worth residents to consider moving to lower-tax states like New Hampshire and Florida.

“Massachusetts in recent years has become tax hungry,” McKenna said, which limits the state’s ability “to keep business owners and entrepreneurs here.”

Jastrem said there are drawbacks and benefits related to the new tax.

“It’s a challenge for the clients that we’re trying to serve and it could be an impediment to wealth creation and business development in the state,” Heritage Financial's Jastrem said. “But you also want resources for the state to be put to good use.”

Even with the tax in place, the tax bill in Massachusetts is lower than in other states, Chen said.

“No one wants to pay [the millionaires tax],” he said. “But that’s not to say it’s enormous. We don’t have taxes like California or New York state.”