Remember the TV show, “Who Wants to be a Millionaire”? It first aired in the US in 1999 and was based on a British show by the same name. The premise was that contestants would try to win a top prize of $1,000,000 by answering a series of multiple-choice questions, usually of increasing difficulty. As the questions got harder, contestants could use a “Lifeline” which allowed them to ask for help. I remember watching it occasionally back then. We had very young daughters at home and this was a show we could watch with the whole family. Not that anything other than the Little Mermaid or Elmo could hold their attention for more than a few minutes at a time.
Of course, at the time, the thought of being a millionaire was – and still is – a dream for many. I’m not just talking about saving up a million bucks to retire either. A lot of folks would love the title of “millionaire” right now too. Who wouldn’t like the comforts that come with wealth?
Unfortunately, though, some Massachusetts folks may not be so happy to be labeled as such. The 2022 midterm elections resulted in a change to local taxes that penalize those high earners with a so-called Massachusetts “millionaire tax” that state voters just approved by a margin of about 52% to 48%. The new tax is estimated to bring in roughly $1.3 billion in revenue during fiscal 2023.
Starting on January 1, 2023, Massachusetts taxpayers will now pay an additional tax of 4%, on top of the regular income tax of 5% on taxable income over $1 million, with the threshold being adjusted in subsequent years for inflation. According to the ballot question, the funds are to be used, “for quality public education and affordable public colleges and universities, and for the repair and maintenance of roads, bridges and public transportation₁.”
Get this though, the tax also applies to “one-time millionaires,” including people who make more than $1 million in taxable income from selling their homes or businesses. This means that some folks who would normally not even come close to being considered a millionaire may be taxed like one in some years.
“Democrats have been working for a long time to add some tax brackets and progressivity to this system,” said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center, pointing to the current 5% flat income tax in Massachusetts regardless of earnings₂.
However, supporters say the tax is a necessary step to address the gap between the state’s wealthiest and poorest residents. The Economic Policy Institute ranks Massachusetts as the sixth-worst state in the country when it comes to income inequality. However, opponents also say it will encourage more high earners and entrepreneurs to leave Massachusetts, especially now that remote work has become acceptable for many office workers₃.
Fortunately, for people who pay Massachusetts taxes and are likely to be impacted by this new tax, there are opportunities to help mitigate its effects, with some being more practical than others.
At the more extreme end, you could move to another state. This is a big decision and should be made as part of a larger discussion of many personal considerations beyond taxes. But, if you’re considering a move to another state anyway, doing this soon offers the opportunity to perhaps avoid the millionaire tax. Keep in mind that, too, that a change in residence can occur during a taxable year, enabling a taxpayer to claim partial residency for any year of change.
Keep in mind, though, that this may not be a solution for everyone and you may not be able to avoid Massachusetts taxation—even for non-residents. Generally speaking, if a non-resident works in the state or earns business or other income taxable there, you’ll be subject to the states’ tax laws. Also, if you own a vacation home in Massachusetts you should be careful not to spend more than 183 days in the state each year, or you’ll automatically be considered a resident.
Another potential solution is to shift some income and expenses between years. Before 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. And for those whose taxable income changes significantly from year to year, you might be able to shift income or expenses to lower income or higher income years, respectively.
For example, if you normally contribute annually to charities, you could accelerate 2023 contributions into December 2022 to ensure you exceed the standard deduction threshold for this year. You’ll then be able to itemize and claim the full amount as a charitable deduction.
Just like the TV show, you too have the ability to use a “Lifeline” – with a little planning on your end from a trusted professional, you can still strive for and enjoy the “Millionaire” status!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week folks.
Jeff Cutter, CPA/PFS, is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA.
Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy.
1. https://tinyurl.com/3fcm52tx 2. https://tinyurl.com/4d4jxku3 3. https://tinyurl.com/4my7t8xm