Planning for The Millionaire’s Tax

In November of 2022, the voters of Massachusetts authorized a brand new 4% tax on state residents with annual revenue over $1 million. Mixed with the state’s present tax fee, it raises the highest tax fee to 9% and applies to each peculiar revenue and capital good points. Now a number of state legislatures have launched related proposals together with California, Connecticut, Hawaii, Illinois, Maryland, New York, Oregon, and Washington, totaling 60% of the nation’s wealth.

In Massachusetts, there have been about 16,000 revenue tax returns filed with incomes over $1 million, or about 0.47% of all taxpayers who filed in 2020. My expectation is that the majority of those that routinely earn greater than $1 million may have the sources to keep away from the Massachusetts tax all collectively by shifting out of Massachusetts. For these taxpayers whose revenue climbs over $1 million in a single yr, akin to when promoting a enterprise or a residence, this is not going to be a viable possibility. For these shoppers, there are a number of ways to attenuate the tax.

Unfold out your revenue.

The Massachusetts regulation specifies that the extra tax is per tax return filed with revenue in extra of $1 million. Subsequently, a married couple might unfold out the revenue by submitting individually, thereby having $1 million every of revenue, or $2 million whole, that doesn’t pay the extra tax. Taxpayers might file individually for Massachusetts and collectively for federal taxes as properly.

One other means of spreading out your revenue is to unfold out the funds over a number of years. That is particularly helpful when promoting property, akin to when the taxpayer is promoting a enterprise or property. There are two methods to unfold out the funds, one is to enter into an Installment Sale settlement, the place the customer pays the sale worth over a number of years. The opposite is to switch the property to be bought right into a charitable the rest belief which pays out the proceeds over a time period of years, both a most of 20 years or on your lifetime. The result’s that, if the payout is beneath the $1 million in anyone yr, the taxpayer avoids the tax.

Transfer out of Massachusetts.

Massachusetts taxes the worldwide revenue of people who’re residents or are domiciled within the state. For non-residents not domiciled in Massachusetts, they’re solely taxed on revenue derived from a Massachusetts supply. Going from being a resident domiciled in Massachusetts to a non-resident not domiciled in Massachusetts is each a subjective and goal course of. Subjective as your domicile is the place you contemplate your property to be. Goal as a result of your should not spend 183 days or extra within the state.

Belief planning

Trusts have at all times been a key factor in property planning – each revocable grantor trusts and irrevocable belief [i] For revocable grantor trusts, the foundations on applicability of the tax are broadly the identical as for a person, because you embody revenue paid to the belief in your particular person revenue tax return. For an irrevocable belief, the revenue tax applies if the belief is a testamentary belief of an Massachusetts decedent or a belief created by a Massachusetts resident and there’s at the very least one trustee who’s a Massachusetts resident.

For present trusts with a number of beneficiaries, the revenue may very well be unfold out in an identical strategy to married {couples} submitting individually, that’s the belief kinds a separate belief for every beneficiary and information a separate revenue tax return for every belief. Whether or not a belief may be so divided is complicated and depends upon the phrases of the belief.

For brand new irrevocable trusts, a taxpayer can even keep away from the tax by creating an irrevocable incomplete present, non-grantor (ING) belief. As long as the ING belief doesn’t have Massachusetts resident trustees, and the grantor has solely restricted rights over the principal and revenue of the belief, it is not going to be taxable in Massachusetts. By being an incomplete present by the phrases of management exercised by the grantor, the belief is not going to be thought of a taxable present for federal present tax functions. This can be a technically complicated tactic for tax avoidance and requires each a wonderful draftsman and a very good non-Massachusetts trustee.

So, the millionaire’s tax is already right here for residents of Massachusetts and should quickly be right here for residents of California, Connecticut, Hawaii, Illinois, Maryland, New York, Oregon, and Washington and misplaced probably extra. You face the selection of both paying the tax, leaving the state, spreading out your revenue, or do some complicated belief planning. Which is finest for every depends upon their state of affairs however know that you simply do have a option to keep away from the tax for those who select to take action.

[i] For a dialogue of the various kinds of belief please see What is a Trust?