An extra tax in a few states now takes aim at the wealthy – and more states may soon join them.

California, New York, Connecticut and the District of Columbia levy a special tax on high earners. At least two other states are considering such taxes.

The California tax is 1 percent on income exceeding $1 million. “Millionaires are often aware of the tax [but] those who have a one-time spike in income are often surprised by it,” said Mary Kay Foss, CPA in Walnut Creek, Calif.

Massachusetts’s income tax currently has a single flat rate of 5.1 percent for most income. “The Massachusetts Fair Share Amendment, which would’ve created a 4-percent tax on any income above $1 million, was not allowed on the ballot in 2018,” said Brian Pirri, principal at New England Investment & Retirement Group in North Andover, Mass., adding that there have since been several recent attempts to revive such legislation.

New Jersey just instituted a 10.75-percent rate on $5-million-plus earners; the governor would like to drop the threshold to $1 million. The proposal “has met some stiff resistance and seems to be stalled for the moment,” said Michael J. Repak, CPA/PFS, J.D., and senior estate planner with Janney Montgomery Scott in Philadelphia.

Connecticut’s top rate applies to individuals making more than just $500,000 ($1 million-plus for couples); proponents want to increase the rate.

“Politically, this [tax] happens because it raises the state’s revenue and only affects a few residents,” said Gail Rosen, a CPA in Martinsville, N.J. “We represent clients who are wealthy and they’re very upset about the high state tax rates, coupled with the tax reform of the SALT cap. Each and every one of them talks about moving out of New Jersey.”

The SALT cap limits the deduction for state and local income, real estate and sales tax to $10,000, which particularly affects high-income earners in high-tax states. “The loss of this deduction seems to irritate people even if they weren’t getting the benefit from it,” Repak added.

“Most [wealthy] New Jersians are aware of the potential increase in tax and are consistently asking about lower tax states, specifically Pennsylvania and Florida,” said Andrea Diaz, CPA with SKC & Co., Boonton Township, N.J.

“We’ve had numerous client-initiated discussions around what it would take to change their resident state outside of California to a state that doesn’t have an income tax, such as Nevada or Texas,” said Christopher Rand, managing partner at The Wealth Consulting Group, San Diego.

Still, “most fail to grasp the complexities of moving for state taxes,” said Daniel Morris, a senior partner at Morris + D’Angelo CPAs in San Jose, Calif., adding that states sometimes tax “former” residents for the year of the move, “a bad outcome that can be avoided with proper planning, consideration, understanding of rules and obligations and proper documentation.”

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