Massachusetts Millionaire’s Tax

A picture of an adult couple working on documents at home

 

In May 2016, the Massachusetts Legislature, in constitutional convention, adopted an amendment to the state constitution authorizing a 4% surtax on personal income in excess of $1 million. In order for this amendment to be added to the constitution, it must be adopted by another constitutional convention in May 2017 and then it needs to be approved by the voters in November 2018. The earliest the tax could go into effect would be January 2019. As might be expected, the proposed amendment has both supporters and detractors. And, of course, its passage would greatly impact many JDJ clients.

How would it work?  A taxpayer earning in excess of $1 million would pay the state’s standard income tax rate (currently 5.1%) on the first $1 million of income, and then pay an additional 4% (for a total of 9.1%) on every dollar above $1 million. The Massachusetts Department of Revenue expects 19,500 taxpayers would be impacted in the first year.

The additional revenue raised by this tax is earmarked for spending on public education and transportation, but critics point out that the Commonwealth’s constitution precludes the adoption of any amendment that “makes a specific appropriation of money from the treasury of the Commonwealth.”* Therefore, there is no guarantee that the funds will be used for their stated purposes.

Why an amendment to the constitution and not just a change in the tax laws? Because it is widely believed that the Massachusetts constitution, as currently written, does not allow for progressive or graduated income tax rates and therefore the law would likely fail a constitutional challenge. Here again, critics state that the current proposal should not be adopted because it is currently “unprecedented” to include a permanent surcharge in state constitutions.

If the proposed amendment passes, “basically this will double the MA tax rate for those impacted,” says Laura Barooshian, partner in the Private Client Practice at DiCicco, Gulman & Company (DGC). “The total 9.1% tax would put us in line with high-tax states like New York and California.” Barooshian points out that the new tax has the potential to impact small business owners, and may even have some considering a move out of Massachusetts.

I asked Barooshian if clients are already contacting her about this issue. “Oh yes,” she replied. “I’m telling them that thanks to the constitutional process it’s still a long way off, so there is time to plan if necessary.” Short of moving out of the Commonwealth, what can clients do to help avoid the tax?  “Even if you leave the state, if you have Massachusetts source income there may be no way to avoid paying at least some of the tax,” she says.  “For example, a taxpayer who owns ‘real property’ in Massachusetts and sells it at a taxable gain will pay tax on the gain in Massachusetts, regardless of the state they now call home. There is planning that can be done to avoid being taxed in two states, but Massachusetts has the authority to tax the income because the property is physically located in Massachusetts. We continue to monitor the situation and have discussions with our clients who own property in Massachusetts.”

However, Barooshian says there are some things residents can do to help mitigate the tax – or at least to minimize its initial impact: “We’re discussing the possibility of accelerating taxable income prior to 2019 in certain circumstances – for example, exercising stock options or shifting compensation/bonus income into 2018 may be a consideration.”  However, it is a bit of a cat-and-mouse game because there is the danger of doing something but then the amendment may not be adopted. Tax planning in November and December of 2018 could be very complicated.

Nevertheless, Massachusetts source income aside, what about those residents who decide to move out of state to avoid the tax? “Changing your state of tax residency may invite a Massachusetts domicile audit,” she says.  And though making sure that you are not in the state more than the maximum allowable number of days is important, “that’s not the only thing the state will look at,” she points out. According to Barooshian, the state will scrutinize travel calendars, bank statements, credit card statements, and company documents. They will also look at where your doctors are located, where your tax returns are mailed, where you are registered to vote, the address on your driver’s license, where your cars are registered, where you own real estate (a vacation home in Massachusetts is okay, but is a consideration), where you attend religious services and country clubs – among other things.

If you are contemplating making any changes in anticipation of the amendment’s passage, it’s important to consult competent advisors and do careful, thoughtful planning, considering all the pros and cons of any decision. As always, JDJ stands ready to assist its clients with their tax planning needs.

*Source: http://commonwealthmagazine.org/economy/dump-the-millionaire-tax/