Massachusetts Millionaires Tax: Planning for High-Income Taxpayers

Written by: Jonathan Yorks, CPA

When Massachusetts voters head to the polls this November, one hot button issue on ballots will be the so-called “Massachusetts Millionaire Tax.” This surtax on high-earning taxpayers in the state faces criticism from business leaders and investors but strong support amongst voters.

This article looks at what this new tax would entail and how it could impact Massachusetts taxpayers.

What is the Massachusetts Millionaires Tax?

In June 2021, the Massachusetts legislature approved a proposed constitutional amendment, formally known as the Fair Share Amendment. This amendment would impose a 4% surtax on income over $1 million. That 4% would be in addition to the existing personal income tax rate, which is currently 5% on most income except for short-term capital gains, which are taxed at a 12% rate. The threshold for the surtax will be adjusted annually for inflation.

The legislature’s approval means the amendment will appear on the ballot in the general election on November 8, 2022. The issue is almost sure to be approved by voters, as a MassINC poll found that 70% of Massachusetts voters support the measure. If it passes, the surtax will take effect for the 2023 tax year.

Earlier this year, the Center for State Policy Analysis at Tufts University issued a report on the potential impact of the Millionaires Tax. The analysis found that the tax would raise an additional $1.3 billion in revenues in 2023. The state plans to funnel those funds to education, roads, bridges, and public transit, although state legislators would determine specific funding plans.

While very few households in Massachusetts earn over $1 million in any given tax year, they account for roughly 22% of the total taxable income in the state, according to the report.

Calculating the Tax Impacts

While the exact mechanics of the tax calculations are subject to final regulations, it can be helpful to illustrate how a high-income taxpayer might be impacted.

For example, assume a taxpayer has wages of $1.5 million and $500,000 of long-term capital gains for a total gross income of $2 million. Currently, their state income tax liability would be $100,000 ($2 million x 5%). Once the Millionaires Tax takes effect, the same income would result in a state income tax liability of $140,000. That figure includes the normal 5% income tax on $2 million of income, plus the 4% surtax on income over $1 million.

Planning for the Millionaire Tax

The Center for State Policy Analysis report considered how many impacted taxpayers might move out of state or engage in tax avoidance, revising its estimated revenue generation down from $2.1 billion without these behaviors.

Short of moving out of state or taking steps to lower your taxable income, there are few (legal) ways for high earners in the state to avoid the tax. For now, the best strategy is to reach out to your Water & Shuffain tax advisor to start planning for the impact.