Tax attorney Suzanne DeWitt can help you minimize your tax burden.
In recent years, tax proposals specifically targeted at high earners have been on the rise in many U.S. states.
Last year, voters in Massachusetts enacted the first “Millionaire Tax” in the United States, which went into effect on June 1, 2023. This new law, also known as the “Fair Share Amendment,” applies a 4% tax on annual income above $1 million in the state, on top of the 5% flat tax that applies to all income. Residents of Massachusetts are taxed on all their income, regardless of where it comes from. For non-residents, this tax only applies to income that is effectively connected to Massachusetts.
Similar proposals have been considered in numerous other states, including California, Connecticut, Hawaii, Illinois, Maryland, New York, Oregon, and Washington. “Millionaire tax” legislation has also been proposed at the federal level, although it appears highly unlikely to pass anytime soon given the current composition of Congress.
For high earners and high-net-worth individuals, these taxes represent a significant tax planning challenge. The rise of the “millionaire’s tax” underscores the importance of a holistic tax minimization strategy to protect your wealth in a changing political environment.
Legal strategies to avoid the millionaire tax.
A number of tax planning strategies can be used to minimize the tax burden under the current Massachusetts millionaire tax and future millionaire taxes. (Of course, the applicable strategies for millionaire’s taxes in other states will depend on how those future taxes are structured.) Some of those techniques include:
- Earn income before the tax goes into effect. Under most circumstances, deferring taxable income is advantageous, but the strategy changes if a new tax is about to go into effect. In the last months of 2022, high earners in Massachusetts were quite busy with tax planning as they tried to get their income on the books before the new tax went into effect in 2023. Of course, the window of opportunity to do this in Massachusetts has closed, but similar strategies will be employed if other millionaire’s taxes are passed in other states.
- Spread out income over multiple years. If you earn over $1 million in income because of a single event, spreading out that income over multiple years may work to your advantage. For example, if you are selling an asset like a business, it may be possible to work out an installment sale agreement to spread out the payments. Since the millionaire tax only applies to income above $1 million in a single year, spreading the income across multiple tax years can reduce or eliminate your tax liability.
- Set up a trust. There are several ways to use either a new or existing trust to minimize your tax burden under the millionaire’s tax. For example, if you set up an irrevocable incomplete gift, non-grantor (ING) trust with a non-Massachusetts trustee, it will not be taxable in Massachusetts. However, this is a technically complex technique that requires an experienced tax attorney.
- Change your tax filing status. If you are married, it may be advantageous to file separately instead of jointly to avoid the millionaire tax, especially if the separate filing puts both spouses below the $1 million threshold.
- Move out of the state with the millionaire tax. As long as taxes vary from state to state, moving to a different state will always be an option to avoid taxes. Of course, there are numerous other considerations when deciding where to live, such as schools, healthcare, transportation, employment, and overall quality of life. Changing where you are domiciled for tax purposes can also be tricky if you still spend a significant amount of time in your former state.
The key is to create an effective, holistic tax minimization strategy.
In well over two decades of practicing tax law, we’ve found that you can’t talk about anything without talking about everything. In other words, there is no such thing as a strategy just to avoid the millionaire’s tax. Whatever strategy (or combination of strategies) you choose will have ripple effects on the rest of your finances and your life.
Our objective isn’t just to minimize the millionaire’s tax. We are here to help you achieve your broader goals, whether that’s preserving your legacy, giving yourself more flexibility to explore new opportunities, providing for your children, or supporting a charity that matters to you. We’ll listen to your whole story, explain your options, and work with you to create a plan that fits your goals and your future.
In short, the millionaire’s tax isn’t something to be afraid of; it’s merely something to incorporate into a comprehensive tax minimization strategy. If you’re concerned about the implications of the millionaire’s tax, attorney Suzanne DeWitt and the team at DeWitt PLLC can help. Give us a call or contact us online today.