Welcome to the 'Millionaire's Tax'

It’s been called the cradle of liberty, throws great parties (tea) and is the state with the nation’s third highest median income (if you include D.C.).

And now? Now it’s decided to turn the screws on some of its biggest earners.

Late last week Massachusetts Gov. Maura Healey ratified the fiscal year 2024 state budget, which integrates a 4% surtax on individual earnings above $1 million. This new provision, which comes into effect from Jan. 1, 2023, will be layered over the preexisting 5% state income tax rate.

Dubbed the "Millionaire's Tax" or "Fair Share Amendment," this tax hike is the outcome of a recent modification to Article 44 of the state's constitution. The amendment got the green light from Massachusetts' citizens in a 2022 ballot. Lawmakers have said the anticipated revenue from this surcharge will finance sectors like education, transportation infrastructure and public transit.

Taxpayers with incomes surpassing the $1 million mark will now face a cumulative tax rate of 9%. This limit will be revised annually, factoring in inflation.

This new tax doesn’t just target consistent high earners' one-off significant income events, such as property or business sales may also be affected.

To navigate the financial implications of this surtax, clients (after professional advice) have several strategies:

• Entrepreneurs and business owners: One avenue for business owners is modifying how they orchestrate their business's sale. Opting for an installment sale could spread the gain recognition across multiple years. Another approach could involve elevating the business's selling price to counterbalance the new surtax impact.
• Utilizing non-grantor trusts: Irrevocable trusts are popular tools to pass on wealth while curtailing estate taxes. Typically, the person creating the trust pays the income tax on the assets, enabling the assets to amplify without any tax implications. Given the new surtax, individuals might pivot to using non-grantor trusts to reduce income tax. However, the ramifications of such a shift need to be weighed against potential estate tax benefits.
• Residency shift: Relocating outside Massachusetts could be a viable solution to bypass the state's income tax. The state's revenue department evaluates various criteria, like the duration one spends outside Massachusetts, to authenticate a residency change. Nonetheless, earnings sourced from Massachusetts could still incur the state's income tax.