On November 8, 2022, Massachusetts voters approved an amendment to the Massachusetts Constitution imposing, effective January 1, 2023, a surtax of 4% on an individual’s annual taxable income to the extent it exceeds $1 million. This advisory addresses how Massachusetts taxpayers can plan to minimize the impact of the surtax.

First, a little perspective. According to a Tufts University’s analysis[1] on the new surtax, the new surtax applies to around 0.6% of Massachusetts households in any given year. Most taxpayers subject to the surtax will only pay it in years when they have a significant event, such as a business or stock sale. The tax won’t apply to them in other years. Those taxpayers can manage the impact of the surtax by planning when they recognize gains and losses.

Some other taxpayers, though, will be subject to the tax every year it is effective. As to those taxpayers, the surtax will become just one more element of their annual tax planning.

For taxpayers who want to avoid the surtax altogether on some or all gains, there are options they can execute in 2022. The options fall into one of three buckets: 

• Changing your tax domicile/residency
• Dividing assets and income within a family to reduce the impact of the surtax
• Selling assets to third parties to cause gains to be recognized in 2022

Each of these options has potential costs:  legal fees, transfer costs, transfer taxes, and income taxes.

Additionally, before executing a plan to avoid the surtax, consider the global economic and tax impact of your plans. For example, you may find that accelerating the payment of income taxes into 2022 may be more expensive on a present value basis than paying taxes including the surtax in later years if a taxpayer would not have otherwise been inclined to sell the assets in the near-term.

An additional twist to the analysis is the long-awaited expected implementation of the Massachusetts charitable contribution deduction. Given the increase in tax on income over $1 million beginning in 2023, it may make sense to delay year-end charitable giving into 2023 if there is a significant income event that cannot be accelerated into 2022. This option, like all of the options above, requires careful consideration of the effects of delaying charitable contributions at the federal level in addition to state level.

We are happy to assist you in your planning for the surtax, and for more global tax planning as well.

[1] Evan Horowitz, Thomas Downes, and Bridget Wall, “Evaluating the Massachusetts Millionaires Tax”, Tufts University, Center for State Policy Analysis (Jan. 2022).