3. Defer some charitable contributions into 2023. One example of an expense that is not currently deductible in Massachusetts, but might become deductible as soon as 2023, is charitable contributions. For many years, charitable contributions have not been deductible in Massachusetts, even though they were authorized many years ago for future years in which the Commonwealth was financially stronger. It appears that 2023 might be such a year, possibly offering a chance for some taxpayers to “bunch” their charitable contributions into 2023 or subsequent years to reduce the portion of their taxable income subject to the millionaire tax.
4. Carefully consider your choice of business entity type. Income from passthrough entities (“PTEs"), such as partnerships and S corporations, has traditionally been taxable to the individual owners, rather than to the entity. Massachusetts, however, has a special rule that taxes S corporations with at least $6 million of income an additional 2-3%. With the millionaire tax, this effectively means that some S corporations may be taxed by Massachusetts at a 12% rate. For these S corporations, it may be worth considering a partnership structure or even that of a traditional C corporation. While the base corporate tax rate is 8%, the additional flexibility around timing of dividend distributions may allow owners to avoid the millionaire tax.
And just to make the forthcoming tax picture even more complex, Massachusetts currently allows PTEs to elect to pay the business-related income taxes of their owners at the entity level. While this may still be a good strategy for minimizing federal taxes, it does not save business owners from the millionaire tax. Massachusetts treats the PTE payments as a credit, which does not decrease taxable income, rather than as a deduction.
Of course, we must await further guidance from Massachusetts to understand fully how the millionaire tax will be administered. Nevertheless, it does appear that planning around the millionaire tax in its current form could offer meaningful tax savings. Indeed, this type of planning could become even more important in the future, as the door has now been opened to graduated income tax rates in Massachusetts. Whether there are additional rate tiers added in the future is anyone’s guess, but if other states are any guide, vigilance is warranted.
Michael Nathanson is CEO of The Colony Group. Justin Gilmartin is senior vice president of tax services at The Colony Group.