Massachusetts Millionaire Tax: Mitigating the Impact

By Andrew Richardson, CFP® & Lynne Yu, CPA | Mar 13, 2024 |

In November 2022, Massachusetts voters approved a 4% surtax on residents with annual income exceeding $1 million, ushering in a new era of financial considerations. While this surtax (“the Massachusetts Millionaire Tax”) affects high earners, it also can affect residents who realize extraordinarily high income through a business or home sale.   

Previously, couples could strategically file federal taxes as Married Filing Jointly (MFJ) while choosing Married Filing Separately (MFS) for their Massachusetts returns, effectively dividing family income to allow many to stay below the $1 million threshold. However, as of January 1, 2024, Massachusetts requires uniformity in filing statuses for state and federal returns — closing this common loophole.  

Many asked, “What now can I do to mitigate the effect of the Massachusetts Millionaire tax?” 

Who is impacted by the Massachusetts millionaire tax?

The 4% surtax applies to all taxpayers, including individuals, trusts, estates, and unincorporated associations, with taxable income exceeding $1 million in a taxable year beginning in 2023. The taxable income includes all taxable income, including but not limited to earned income, interest, dividends, and capital gains, except for tax-exempt interest on federal and Massachusetts obligations.   

Our Boston-based team works with clients in Massachusetts and Greater New England on all aspects of tax mitigation, including the Massachusetts Millionaires Tax. We serve as our clients’ Personal CFO and advise on all aspects of their balance sheet, including public and private investments, real estate, estate planning, philanthropic giving, and more. 

Based on each client’s individual circumstances, we often recommend one or more of the strategies below to minimize the impact of MMT.  

#1 Spread out your income

When selling an asset with significant unrealized appreciation, consider an installment sale that would spread the gain over multiple years. The same concept applies to multiple assets within a portfolio. Staggering the sale of portfolio assets over multiple calendar years (even by simply postponing certain sales from December to January) could lead to tax savings. 

#2 Exchange properties in a 1031 Exchange

Postpone the realization of capital gain, and thus both the federal tax on capital gain, the standard Massachusetts income tax, and the 4% surcharge, by exchanging it for other income-producing property through a 1031 exchange. 

#3 Leverage an irrevocable trust

An irrevocable trust refers to any trust where the grantor cannot change or end it after its creation; examples include an incomplete gift non-grantor trust (ING Trust) and a non-grantor gift trust for descendants. Connect with an estate planning attorney and advising team to determine if they suit you. 

#4 Increase your charitable giving

Starting tax year 2023, Massachusetts will restore charitable deductions against taxable income. If you oppose the MMT and are charitablely inclined, making philanthropic contributions would reduce your Massachusetts taxable income. (Note: Massachusetts deductions are not allowed for household goods or used clothing contributions.) 

Additionally, it may be beneficial to consider a Charitable Remainder Trust (CRT). Funded with appreciated property, the asset(s) can be sold and reinvested without paying any capital gains or other income tax, and you will receive a partial deduction equal to the present value of the assets transferred into the trust. The donor will receive an income stream on an ongoing basis from the Trust property.   A donor-advised fund is a separate and distinct charitable vehicle worth considering. 

#5 Move out of Massachusetts

Consider establishing your primary residence in a low-tax state to avoid the 4% surcharge and other Massachusetts taxes—especially if you already spend considerable time in the other state. Before your move, please consult with your tax advisor about domicile planning in case of a Massachusetts domicile audit. 

We advise our clients on tax mitigation

Accumulating, accessing, or transferring wealth has serious tax implications. The Brighton  Jones Tax Advisory Group is an integrated team of experienced CPAs and tax lawyers who offer holistic tax planning. Tax experts are part of your Personal CFO team to bring a coordinated strategy to your big picture. 

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