Planning for Ballot Question #1

Massachusetts voters approved a constitutional amendment establishing an additional 4% state income tax on annual taxable income exceeding $1 million for individuals.

The $1 million threshold will be adjusted annually to reflect cost-of-living increases. This surtax, coupled with the current 5% flat tax, brings the top state income tax rate to 9% starting Jan. 1, 2023.

If you have clients who may be subject to this tax, we welcome the opportunity to explore wealth planning strategies to minimize its impact, including:

2022 Action

• Accelerate Income. Where possible, find opportunities to accelerate income to 2022. Individuals who may be subject to the surtax due to a one-time sale on a personal residence or flow-through business in 2023 may consider:
  • Moving up the closing date to the 2022 tax year.
  • If selling in installments, elect to trigger the full gain in 2022.

• Consider a Roth Conversion in 2022. Converting a traditional IRA into a Roth IRA will trigger a tax this year but brings the advantage of having an after-tax Roth IRA to draw from in those years in which income is close to exceeding the $1 million threshold.

Planning for 2023 and Beyond

• Look for Opportunities to Smooth Income. The surtax only applies in years where income exceeds $1 million and only to the extent it exceeds $1 million. Consider strategies which may smooth income to below this threshold such as:
  • Entering into installment sales or 1031 like-kind exchanges for sales of large, appreciated property.
  • Bunching charitable deductions in years when higher income is expected (such as making transfers to a donor advised fund).
  • If you are 70 ½ or older, take advantage of making a qualified charitable distribution (QCD) by donating up to $100,000 to a charity directly from a taxable IRA instead of taking the required minimum distribution.
• Review Filing Status. It appears that the $1 million threshold applies to both single and married filing jointly filers. Explore whether changes to filing status is beneficial from an overall tax savings perspective, such as filing tax returns as married filing separately to possibly avoid the surtax.
• Reconsider Tax Situs. For individuals who consistently report more than $1 million, consider:
  • Relocating and taking domicile in a state without an individual income tax or a state with a lower income tax rate.
  • Transferring income-producing assets to non-grantor trusts domiciled outside the state. 
  • Moving or transferring assets to a trust domiciled in another state requires significant planning, and we expect the Massachusetts Department of Revenue to audit taxpayers who suddenly change residency in response to this tax. Work with an advisor to review the residency requirements to document the move to the new state.
• Gift, If Aligned with Goals. Consider making gifts of income-producing assets to individuals who have lower taxable income or live outside of Massachusetts.

While this new surtax may have considerable implications as we approach the 2023 effective date, whether the strategies outlined above makes sense for your clients is dependent on their unique goals and circumstances.

Please let us know if you would like more information on how these strategies may support you and your clients’ plans for this change in tax policy.