Many People May Need to Plan for the Massachusetts Millionaire’s Tax

The new “Massachusetts Millionaire’s Tax” is expected to regularly impact less than 1% of households in the state—but many more families will take an extra tax hit when they go through events such as the sale of a home, transfer of a business, or conversion of a retirement account. People who did not think this tax would affect them may be in for a very unpleasant surprise.

It is a good idea for everyone to understand this new tax and the potential impact it could have in the future. Planning ahead could save your family considerable funds down the line.

How the New Law Will Work

Anyone who registers taxable income of over $1 million starting in 2023 will be expected to pay an additional 4% income tax on the income over $1 million. This tax is on top of the standard income tax of 5%.

Few people make that much in salary or investment income every year, so at first glance, it seems like this tax would only affect the richest of the rich in the state. But that is not necessarily the case. If you are selling a home or business, for instance, you may see a sudden jump in your taxable income that suddenly subjects your family to this tax. It is important to understand what could happen and the steps you can take to reduce your potential tax liability.

Steps to Consider Before the End of 2022

There is still time to take certain steps before the tax takes effect next month. First, if you are considering converting funds from a traditional IRA to a Roth IRA, this might be the best time to do it. A conversion is treated as current income, but once converted, the amounts grow tax-free. If you convert to a Roth in 2023 or later, the conversion amount could push your total income above the millionaire tax threshold.

Another consideration before the end of this year is how you plan to recognize capital gains and losses. It may make sense to accelerate the recognition of capital gains and delay the harvesting of capital losses until 2023 when they have greater usefulness.

Finally, you may also want to re-think standard strategies for recognizing other forms of income. Typically, advisors recommend delaying the recognition of income in most situations. Still, if you could be subject to the new additional tax, it might be better to accelerate certain income into 2022 to avoid the extra tax on those amounts. If you sell property, selling that property in installments could help keep income below the MMT threshold.

Planning for the Future

It is a good idea to consult your estate planning attorney and financial advisor to develop a plan to minimize additional tax liability going forward. Potential strategies to consider could include:

  • Making gifts from a traditional IRA to a qualified charity
  • Changing your municipal bond strategy to focus on Massachusetts bonds
  • Donating appreciated securities
  • Establishing a Donor Advised Fund and bunching several years’ worth of charitable gifts to the fund
  • Using a Section 1031 exchange to defer recognition of gain on commercial real estate sales
  • Filing separate state tax returns from your spouse

Of course, there are many additional options such as changing your domicile or making additional gifts to family members. The earlier you begin working with planning professionals, the more time you will have to develop the right strategies for your family.

If You’re Selling Real Estate or Reconsidering Your Estate Plan, Jordan & White is Ready to Assist

At Jordan & White, we work hard to enable our clients to take advantage of the best available opportunities in estate planning, real estate transactions, and related matters. We want your family to be prepared for whatever the future may bring. To talk to us about how we could assist in your situation, just give us a call.