In November 2022, Massachusetts voters approved a ballot measure known as the “Fair Share Amendment” or “Millionaire Tax.” The tax is a constitutional amendment that establishes an additional 4% state income tax on that portion of annual taxable income over $1 million. Revenues from the tax will fund education, road maintenance, and transportation.
Who the millionaire tax affects
The term “millionaire tax” is somewhat of a misnomer, as many who do not earn a seven-figure annual salary may still be subject to the extra tax in certain circumstances.
One-time events, such as the sale of a home or a business, an inheritance, or investment returns, could trigger the millionaire tax for anyone. Thus, the question “what is a millionaire?” has a new answer and new meaning.
Because the millionaire tax is effective on January 1, 2023, some steps to reduce taxable income may be warranted in the next few weeks.
How to prepare for the millionaire tax before the end of the year
In addition to following the year-end tax strategies we outlined in November 2022, there are still a few actions to consider if you want to try to keep your annual income below the $1 million tax threshold.
- If you anticipate having more than $1 million in capital gains in 2023, you can accelerate your capital gains income by selling before the end of 2022.
- You may want to convert your IRA to a Roth IRA before the end of the year. Even though you will pay taxes in 2022, the distributions from the Roth will be tax free, therefore it should not be counted in your income in future years, making it less likely you will have over $1 million in income in the future.
- If you are due a one-time bonus from your employer that would increase your income to over $1 million, request it prior to year-end.
How the millionaire tax impacts the sale of a home or business
Selling a home or a business is another trigger for the surtax. While it may be too late to sell your primary residence or a business by December 31, 2022, there are still ways you can protect these assets from being subject to the “fair share” tax.
It is important to note, that the additional 4% state income tax is applied only to the proceeds of the sale that exceed $1 million. Everything below that threshold is taxed at the current Massachusetts income tax rate. And this tax applies only to the gains realized from the sale of your home – that excludes your basis (your purchase price + any improvements you made). If the house you sell is your primary residence, you may also qualify for a capital gains exclusion of $250,000 (single) or $500,000 (married, filing jointly), which could reduce the taxable income on the sale of your home. If the sale of your home causes your income to exceed $1 million, a married couple filing as “Married Filing Separately” in Massachusetts may allow each spouse to be below the $1 million threshold for the increased tax.
There are a number of potential strategies to mitigate the impact of the millionaire tax in Massachusetts if you plan on selling a business in 2023. You could sell your business in an installment sale over an agreed-upon number of years to reduce your tax burden. Another option is to create a non-revocable, non-grantor trust in a state other than Massachusetts that is the owner of the business. In such a case it may be possible to have the gain on a sale taxed in a state other than Massachusetts. This technique may also allow you to shift assets to your children for estate planning purposes.
Individual Planning for the “Millionaire Tax”
As a resident of Massachusetts, the state taxes your worldwide income. Non-Residents of Massachusetts are only taxed on income that is effectively connected to Massachusetts. Although extreme, if one does not have income effectively connected to Massachusetts, an individual can change their domicile to a state with lower income taxes. This will not make sense if an individual is employed by a Massachusetts company.
As noted above, another option for a married couple whose income exceeds $1 million may be to file their tax return as “Married Filing Separately” in Massachusetts.
The millionaire tax is coming – what to do now
There are a lot of unknowns about the “fair share” amendment. However, even as we await guidance from Massachusetts, one thing is clear: it will be in effect on January 1, 2023. Tax professionals at Sassoon Cymrot are keeping a close eye on all the implications of this new legislation. Until clear regulations are shared, you should bring any and all your concerns about the millionaire tax to your tax advisor or attorney.
The tax attorneys at Sassoon Cymrot Law, LLC can help individuals and business owners anticipate and manage all the challenges around the millionaire tax law as regulations are communicated. Estate planning and capital gains taxes are areas that you should not navigate alone. Contact us today.