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State Tax Spotlight: Planning for Potential Wealth Taxes


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The state tax landscape is constantly changing. The need to plan ahead is not.

A Coordinated Effort: New State Tax Proposals on Wealth

2023 kicked off with a bang on the state tax front. On January 19, 2023, a united group of lawmakers from eight states unveiled varying proposals for the heightened taxation of wealthy residents. While proposing new state taxes is far from new, the coordinated effort and scope of the proposals is. Ample news media coverage soon followed, leaving many to wonder if the new proposals might pass into law and, if they did, how it may impact them.

As discussed in detail below, the proposals from the states vary significantly in scope. Four states (California, Hawaii, Illinois and Washington) filed legislation for forms of a wealth tax, while the four others offered varying income tax proposals on wealthy residents and capital gains surtaxes. In California, for example, legislation would enact a tax on worldwide net wealth, while in Illinois, the proposal would tax unrealized capital gains as income. In New York, meanwhile, a bill has been introduced to include an additional capital gains tax of up to 15% in addition to the state income tax.

A Clear Trend

The feasibility of enacting each proposal is specific to each state’s political landscape, and it is likely that in some instances legislation will be met with legal challenges. That said, the list of states proposing an income or wealth tax represents a growing trend of progressive politicians advancing state-specific tax legislation on wealth, and one we are not likely to see diminish soon. In 2022, for example, Massachusetts voters approved a 4% income tax surcharge for residents with income over $1 million, bringing the top income tax rate to 9%.

As we have often emphasized amid the political ebbs and flows of recent years, it is far more productive to build your ship for all seas than attempt to predict the shape of future legislation. Below we provide an overview of each state’s proposal, as well as recent legislation proposed in Oregon. Following, we discuss a number of planning strategies appropriate for such proposals as well as passed legislation, like that in Massachusetts, where an income surtax is the focus.

While each family’s tax situation is unique, the following strategies are worth considering, with your teams of advisors, in order to navigate a potentially fluctuating state tax landscape.

1. Smoothing Income. Consider strategies to smooth income below thresholds where additional tax may be applied. These can include:

  • Entering into installment sales or 1031 like-kind exchanges for sales of large, appreciated property, to spread out income over a period of years
  • Bunching charitable deductions in years when higher income is expected (such as making transfers to a donor advised fund)
  • For some married taxpayers, additional deductions or reduced income tax rates may be possible by filing separately at the state level
  • If you are 70 ½ or older, taking advantage of a qualified charitable distribution by donating up to $100,000 to a charity directly from a taxable IRA instead of taking the required minimum distribution
  • Advancing losses to the current year in order to offset income, or delaying income to future years, if possible

2. Roth Conversion. Converting a traditional IRA into a Roth IRA will trigger a tax but brings the advantage of having an after-tax Roth IRA to draw from in those years in which income can be pushed into higher thresholds.

3. State Income Deductions. Coordinate with your tax preparer to maximize state income tax deductions and exemptions through state-specific planning.

4. Gifting. Consider making gifts of income-producing assets to individuals who have lower taxable income or live in a state with lower income tax.

5. Changing Tax Situs. For individuals who consistently report income in higher thresholds, 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
  • Remember, moving and/or transferring assets to a trust domiciled in another state requires careful planning and nuanced consideration of the full spectrum of financial and nonfinancial pros and cons. Work with your advisors to review the residency requirements, gain a full understanding of the tax implications and, if you do decide to move or transfer assets, carefully document the move to the new state

Although taxes are a key factor in making your wealth planning decisions, they should always be taken in consideration of your overall plan, circumstances and goals. Reach out to your advisor to discuss the strategies discussed above and how to achieve what is most important for you and your loved ones.

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This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

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