Questions On Massachusetts 4% “Millionaire’s” Surtax

By Lori Paci June 1, 2023

In November of 2022, Massachusetts voters overwhelmingly approved a constitutional amendment that requires a 4% surtax on the portion of income above $1 million for the stated purpose of providing funds for public education, roads and bridges, and public transportation. The surtax took effect on January 1, 2023. The result for Massachusetts’ taxpayers with income over the threshold is a total tax rate of 9% and a capital tax gains rate up to 16% on income above $1 million.

Questions abound as to how the Massachusetts surtax will be implemented, and almost immediately upon its passage concerns over specific income scenarios began to cascade in the minds of taxpayers and their tax advisors.

What happens if you have a one-time event that pushes your income over the threshold in one year? Can a married couple file separately to reduce being affected by the surtax? What happens if you want to move out of state?

While future actions of the Massachusetts legislature could impact all of these scenarios, below is a brief look at the current treatment under the new surtax.

Sell, Sell, Sell! Or Maybe Don’t Just Yet?

As of now, even the income resulting from a one-time event, such as the sale of a home or stock, that increases your overall income over the $1 million threshold will be subject to the surtax. The Massachusetts surtax is implemented per tax return, and is not specific to types of income. Thus, capital gains are still included in its calculation. With Massachusetts’ current short-term capital gain rate at 12%, the surtax can increase the tax on short term capital gains rate to 16%. For long-term capital gains, those rates are 5% and 9%, respectively. If you played the stock market or real estate market well in the last few years and are considering cashing out, this should be on your radar and taken into consideration when discussing tax planning with your advisor.

I Love You, but Let’s Separate (Our Returns)

Married couples may be considering filing separate returns, particularly if the spouses’ combined income will place them over the $1 million threshold. There has been some speculation that since the surtax is based per return, splitting up the income by filing separate returns so that each is under the $1 million will avoid the surtax. Additionally, some married couples have considered whether a one-time event regarding joint property could similarly be split across two returns to reduce the individual gain below the threshold. Special consideration should be taken when transferring ownership of assets from one spouse to include the other. Some transactions may have additional requirements or impacts that should be understood before taking action.

While theoretically filing separately could possibly reduce or eliminate the impact of the surtax, both the legislature and the Department of Revenue are aware that this is a potential strategy. While no current proposal addresses this, it would not be surprising for both or either to address this via legislation or regulation or other guidance in the future. The best that can be said at the moment is that any couple considering this filing position to remain under the surtax threshold should proceed with caution. At the moment, nothing is guaranteed.

Florida Looks Nice This Time of Year

Perhaps the biggest question that has arisen is what happens if one chooses to move out of state, especially to a state known for having lower income tax or no income tax. Currently, the same rules apply as have always been in place when considering moving individually or moving your business out of state.

Individual taxpayers moving out of Massachusetts need to determine whether they want to change their residency or their domicile entirely. A mere change of residency, for instance a situation in which one splits time equally between two states, may not be enough to escape the surtax. In tax, a person’s domicile is where not only they maintain a residence, but where the “center” of their life remains. Domestic, social, and civil activity are all considered when determining one’s domicile. Massachusetts has a hard time saying goodbye to its residents and is often aggressive in pursuing domicile cases. If the surtax has you thinking about packing up and leaving, you should take a close look at what ties you to Massachusetts and plan your move appropriately. It is always wise to speak to your tax advisor before making any major move, and that is especially true now.

If you are a business owner and you are considering moving your business’ headquarters to a different state, you should be aware that you may still be subject to Massachusetts tax based on existing nexus, allocation, and apportionment rules. The potential to reduce taxable income upon the sale of the business exists after such a move; however, the move and any subsequent sale should be carefully structured and discussed with your tax advisor prior to entering any commitment.

Dealing With the Massachusetts Surtax

The Department of Revenue has not yet issued guidance on the implementation of the Massachusetts surtax. The recently proposed state budgets variably include provisions regarding the surtax; however no final budget or terms have been agreed upon at the time of this publication. Much of what the Department will be able to regulate will depend on subsequent actions of the legislature. For now, it is watch, wait, and plan ahead.

For more information, please contact Lori Paci or your BNN tax advisor at 800.244.7444.

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