A constitutional amendment to add a 4% surtax for Massachusetts taxpayers with over $1,000,000 of taxable income was passed with a 52% vote this past Tuesday and is expected to go into effect for the 2023 tax year. The current 5% tax rate will still apply to the first $1,000,000 of ordinary income and long-term capital gains, and the 12% tax rate on short term capital gains remains untouched, but under the new amendment the 4% surtax will be applied on income amounts starting at $1,000,001.

The new surtax provides an opportunity to evaluate your current filing situation, deal structure, and entity structures to see if there could be any changes that would reduce your tax bill. For taxpayers that file married filing jointly, the tax applies to the extent their combined taxable income exceeds $1 million, but for a married individual filing separately the new tax applies only to the extent each individual spouse’s taxable income exceeds $1 million. For taxpayers that may be trying to sell their businesses in 2022, they should consider electing out of installment sale treatment so they can recognize all of the income in 2022 before the new rate takes effect. Normally, taxpayers recognize income in the period received but by accelerating the recognition to 2022, taxpayers may be able to save additional taxes by taking advantage of the 5% rate in 2022. Another planning opportunity to consider is the use of non-grantor trusts. Taxpayers who have typically taken advantage of grantor trusts would normally include the income of the grantor trust on their personal return. Taxpayers whose income could be pushed into the higher 9% tax bracket may need to consider whether a non-grantor trust would provide better tax savings since the non-grantor trust would be a separate taxpayer and the income of the non-grantor trust would not be included on the tax return of the grantor. Since the federal tax bracket for trusts kicks in at a much lower income threshold than for individuals, a thorough analysis would need to be done to determine if there are any potential savings converting from a grantor trust to a non-grantor trust.

Our team is here to answer any questions you may have about how this will impact your filings and would be happy to schedule a time to do an in-depth review together. Please reach out to schedule a convenient time for you.