How to Avoid the Massachusetts Millionaire Tax

Massachusetts imposes a 4% surtax on annual income exceeding $1 million, commonly known as the Millionaire Tax. This tax applies to high-income earners, including business owners, investors, and high-salaried professionals. However, several legal strategies can help mitigate or avoid this additional tax burden.

1. Income Deferral

One effective strategy is to spread income over multiple years to stay below the $1 million threshold. This is particularly useful for business owners or individuals receiving large one-time payouts, such as bonuses or stock options. Deferring income to future years can help reduce taxable income in a given year.

2. Charitable Donations

Massachusetts taxpayers can use charitable giving to offset taxable income. By making donor-advised fund (DAF) contributions or direct donations to qualified charities, individuals can reduce their taxable income while supporting meaningful causes.

3. Trust Planning

Setting up irrevocable trusts can help protect assets and reduce taxable income. Trusts, such as grantor-retained annuity trusts (GRATs) or charitable remainder trusts (CRTs), allow individuals to control how income is distributed, potentially keeping annual taxable income below the $1 million threshold.

4. Capital Gains Management

For those with significant investment income, strategically timing capital gains realization can be beneficial. Spreading out asset sales over multiple years or using like-kind exchanges for real estate can help avoid exceeding the taxable limit in any single year.

5. Business Restructuring

Business owners can explore entity restructuring, such as converting a sole proprietorship into an S-corporation to distribute income more efficiently. Additionally, opting for non-cash compensation methods like stock options or deferred payments can reduce taxable income in the short term.

6. Relocation to a Lower-Tax State

For high-income individuals, changing residency to a tax-friendly state can provide long-term relief from the Millionaire Tax. States like Florida and Texas have no state income tax, making them attractive options for those looking to reduce their tax burden. However, establishing residency requires spending significant time in the new state and severing ties with Massachusetts to avoid legal challenges.

Conclusion

While Massachusetts' Millionaire Tax increases the tax burden on high earners, careful income planning, charitable giving, trust utilization, and potential relocation can help minimize its impact. Consulting with a tax professional is essential to ensure compliance while implementing effective tax-saving strategies.