Last week, Massachusetts voters approved Question 1, the “Millionaire’s Tax,” an amendment to the state constitution that will impose an additional 4% state tax on taxable income over $1 million. This 4% surtax is in addition to the 5% rate already imposed on those earnings. This means that beginning 2023, MA taxable income up to $1 million will be taxed at 5%, and any taxable income over that threshold will be taxed at 9%.
For example, a MA taxpayer who earns $3 million of taxable income in 2023 will owe 5% on the first million, $50,000, and 9% on the next $2 million, $180,000, for a total of $230,000. Whereas in 2022, they would owe a total of $150,000 on the same earnings.
Similarly, when businesses or homes are sold in MA, any taxable gain with other income exceeding $1 million will be taxed at this new rate. It is worth noting that it is only on taxable gain and not the value of an asset. You will not be taxed at this rate for simply owning an asset that is worth over a million, like a home or your 401k.
For MA taxpayers affected, this presents a significant tax increase and not a long time to prepare. For those considering redomiciling to a different state, before proceeding, you should undertake careful due diligence and planning. Courts and state taxing authorities often call into question changes in residency for the sole purpose of reducing taxes, even when a taxpayer purchases a home in a new state. Also, you should work with your tax advisor to consider your situation holistically, including evaluating all state and local tax burdens like property taxes (which are often higher outside of MA). You do not want to move only to discover you are paying more in a different state due to other considerations than the state tax rate.
There are proactive steps your LGA advisors can help you make to mitigate the impact of this tax, like accelerating income or considering entity structure. Due to the complexity of each individual’s tax picture, we recommend you speak with your tax advisor to form your plan.
LGA will continue to monitor guidance on this from the Massachusetts Department of Revenue. If you have any questions about the “Millionaire’s Tax,” we are here to help. Please contact us or call us at 781-569-4700.