The passage of the Massachusetts Millionaires Tax (MMT) back on November 8, 2022 with an effective date of January 1, 2023 has made tax planning for 2023 (and beyond) increasingly important. As a reminder, the MMT is a 4% tax on Massachusetts taxpayers with a net income in excess of $1 million dollars. This is on top of the state’s current flat rate of 5% (except for a 12% rate on short-term capital gains and collectible gains). While it is estimated to affect approximately 0.6% of Massachusetts households annually, some households could find themselves subject to the tax as the result of a one-time event such as a significant Roth IRA conversion or the sale of a home or business. Therefore, the following are a few tax planning ideas to potentially decrease the impact of the new tax.

Charitable Planning
  • Charitable Deductions: Starting in 2023, Massachusetts once again allows charitable deductions against taxable income. If you are approaching MMT and are charitably inclined, making charitable contributions may be a smart tax planning strategy. In addition to cash, using appreciated securities for the donation can offer a double benefit by getting a full fair market charitable deduction and avoiding recognition of the embedded capital gains on the secured gift. Additionally, if you think you will be subject to MMT due to a one-time income event such as a Roth IRA conversion of the sale of your home or company, establishing a Donor Advised Fund (DAF) may make sense. As you can see, taxpayers have some great options with charitable deductions so be sure to speak with us if you believe you may be impacted by MMT this year.

  • Qualified Charitable Distributions (QCDs): If you are over 70 ½ years of age, you can gift up to $100,000 annually from your traditional IRA to a qualified charity. Done properly, the QCD amount will count towards your required minimum distribution (RMD), thereby lowering taxable income. And remember, MMT is based on income, not the value of an asset. For example, if your IRA or 401(k) account has a value over $1,000,000 it is not affected unless your annual distribution exceeds this amount.

Wealth Transfer
If your long-term financial plan includes a transfer of wealth to your family, you have assets you do not anticipate needing during your lifetime and your children or trusts will not be subject to MMT, gifting assets sooner rather than later can help to avoid MMT.

Installment Sales
A logical strategy for keeping income under the $1M threshold is to spread the income generated from selling certain types of assets over several years (to the extent possible). An installment sale is a disposition of property in which at least one payment is received by the seller after the close of a taxable year. Under the installment method, tax is paid on each installment in the year the installment is received. In other words, the income is spread across multiple years. However, there may be economic risks in this approach that must be considered which we can help you to evaluate. 

Changing Domicile
While changing your domicile to a state such as Florida or New Hampshire (two states without an income or estate tax) can seem a bit extreme, income is not taxable in Massachusetts if the taxpayer is not domiciled there. We expect the Massachusetts Department of Revenue to be aggressive in verifying that a change in domicile is legitimate so taxpayers will need to ensure this is done properly.

Change of Filing Status
Based on the current tax language of MMT, it appears that the tax is levied on a per tax return basis, not per household. If the Massachusetts Department of Revenue (MA DOR) does not issue a change in interpretation, a couple may be able to have up to $2 million of income in a year taxed only at the 5% rate. However, if this is changed by the MA DOR or a household is approaching MMT, a couple can file their federal income taxes as Married Filing Jointly (MFJ) and file their Massachusetts income tax returns as Married Filing Single (MFS). We can help determine whether changing your tax filing status will be advantageous for you and are also keeping a close eye on this as the legislature may close this loophole in the future.

Bond Investments
If you foresee being subject to MMT, changing your municipal bond strategy to be Massachusetts focused will exclude that income from Massachusetts taxable income. Additionally, the interest for the U.S. Treasuries is not taxable in Massachusetts.

Qualified Opportunity Funds
Until the end of 2026, capital and qualified Section 1231 gain resulting from the sale of depreciable property and real property used in business and held for more than a year can be deferred by utilizing a Qualified Opportunity Fund. Under this provision, gains must be reinvested within 180 days of the realization event.

1031 Exchanges
A Section 1031 exchange is a real estate investing tool that allows investors to swap out an investment property for another and defer capital gains until the actual disposition of the property instead of at the time of sale. If you are thinking of selling and replacing a commercial real estate holding, please contact us so we can explore utilizing this tool.

The above tax planning ideas or not all encompassing as we wanted to share the ones that would be most applicable to the majority of our clients and friends of the firm. As you can see, utilizing creative tax strategies to avoid the new MMT is time well spent and we will continue to look for ways to minimize tax burdens for our clients. If you are currently subject to MMT, please know we are already working hard on your behalf to minimize the impact. If you foresee approaching MMT in 2023, please contact a member of our team as soon as possible so we can help you make the best decisions that best fit your individual circumstances and accomplish your objectives.

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