As we all contemplate the implications of the 2022 midterm elections, we must be mindful to focus not only on individual elections but also on state-specific ballot referenda. One such referendum of note is the so-called Massachusetts “millionaire tax” that state voters approved by a margin of about 52% to 48%.

What Is The New Tax?
The millionaire tax has been a work in progress for several years, in part because it required an amendment to the Massachusetts Constitution, which previously prohibited a graduated income tax. Under the newly approved provision, Massachusetts taxpayers will now pay a tax of 4%, on top of the regular income tax of 5% (12% for short-term capital gains), on taxable income over $1 million. The threshold will be adjusted in subsequent years for inflation.

The millionaire tax will apply starting in tax years beginning on or after January 1, 2023. Proceeds will be earmarked, according to the text of the ballot question, “for quality public education and affordable public colleges and universities, and for the repair and maintenance of roads, bridges and public transportation.”

How Many People Will It Affect?
According to The Center for State Policy Analysis at Tufts University, as of 2019, there were 21,000 Massachusetts taxpayers with incomes over $1 million. Keep in mind, however, that the number of taxpayers who ultimately could be affected by the millionaire tax is likely much higher for at least a couple of reasons. First, given the impact of inflation, market gains, tight labor conditions, and other factors, income at the upper echelons of the income spectrum generally has increased. Second, some people have, and will continue to have, “lumpy” income that in some years exceeds $1 million and in others does not.

Are There Any Planning Opportunities To Mitigate The New Tax?
For people who pay Massachusetts taxes and are likely to be impacted by the millionaire tax, there are opportunities to deploy mitigation strategies. Importantly, however, some are more practical and impactful than others.

1. Move to another state. In general, changing residency solely for tax purposes can be seen as the ultimate example of “allowing the tax tail to wag the dog.” Such life decisions are complex and really should be made in the context of personal considerations outside taxes.

That said, for those who may be contemplating a move to another state, such as New Hampshire, Florida, or another no/low-income tax state, doing so soon can offer an opportunity to avoid the millionaire tax. Keep in mind that, especially for those who want to move but cannot do so before 2023, residency changes can occur during a taxable year, enabling a taxpayer to assert partial residency for any year of change.

Changing one’s residency, however, requires great care and must be done with full substance—not just form. The Massachusetts Department of Revenue has the right to audit anyone who claims to change their residence and does not do so fully. Note also that, in some cases, it may be impossible to avoid Massachusetts taxation—even for non-residents—if, for example, a non-resident works in the state or earns business or other income taxable there. Owners of vacation homes in Massachusetts need to be careful not to spend more than 183 days in the state each year, or they will automatically be considered a resident.

2. Shift income and expenses between years. Prior to 2023, there is a limited opportunity for taxpayers to accelerate taxable income, including income from sales of appreciated assets, into 2022, before the millionaire tax becomes effective. Again, however, it is important not to allow taxes to be the sole consideration in making complex financial decisions.

After 2022, a similar strategy, especially for those whose taxable income changes significantly from year to year, is to shift income or expenses to lower income or higher income years, respectively. For example, for those who are in control of the timing of bonus payments, it may make sense to accelerate or defer payments into years in which taxable income is otherwise less than the threshold. On the expense side, if the expense is deductible, then it might make sense to accelerate or defer it into years in which income is otherwise greater than the threshold.

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