Earlier this week, Massachusetts residents voted to pass an amendment to the Massachusetts constitution that has the effect of implementing the highly discussed “Millionaires Tax.”
What is the Millionaires Tax?
The Millionaires Tax is a surtax that will be assessed on taxpayers who have more than $1 million of taxable income in a tax year, as adjusted for inflation. Prior to the passing of the Millionaires Tax, Massachusetts only imposed a 5% income tax on taxable income other than short-term capital gains (which has been taxed at 12%).
The new tax will yield an additional 4% on any amount that exceeds the $1 million threshold.
What are Proponents of the Tax Saying?
Proponents of the Millionaires Tax have argued that the amendment will ensure that the state’s wealthiest residents pay their “fair share,” and, in fact, some have referred to the amendment as the “Fair Share Amendment.” In furtherance of this, the amendment states that the amounts generated by the new tax will be used to provide for public education and infrastructure repair and maintenance. Thus, proponents have argued that the revenue generated by the new tax will be used to aid in popular issues, education and infrastructure.
What are Opponents of the Tax Saying?
Naturally, opponents of the amendment have argued that the wealthy already pay their fair share as the percentage of tax they previously have paid was the same as everyone else (i.e., 5%) and regardless of the amount of income. In addition, opponents have argued that while the amendment states that the tax is to be used on education and infrastructure, the additional amount generated is subject to appropriation by the state legislature.
What is the Effective Date of the Tax?
The amendment to the Massachusetts constitution that adds the Millionaires Tax will go into effect on January 1, 2023 and will first apply to the 2023 tax year.
What Now for Practitioners?
Now that the amendment has been passed, clients may be asking whether there is any planning they can do to help reduce the burden that is imposed by the new tax. Of course, one option always will be to move outside of Massachusetts and, no doubt, some clients may be looking for advice on that option. Depending on a client’s lifestyle that may not be a viable option.
A second option, if applicable, is to recognize gain now before the surtax goes into effect on January 1, 2023.
A third option will be for clients to explore the use of a so-called “incomplete non-grantor trust” (commonly known as an “ING trust”). An ING trust allows a grantor to create a trust in a jurisdiction that does not impose a state-level income tax. If properly drafted and administered, the assets held by the trustees of the ING trust could avoid Massachusetts income tax even if the grantor is a Massachusetts resident. However, in order to enjoy the benefits of an ING trust, there is some complexity that clients will need to undertake and accept and so it is not a one-size fits all option.