On Election Day, November 8, 2022, Massachusetts voters approved Ballot Question 1, the so-called Millionaires Tax by a close margin. Of the 50% of Massachusetts registered voters that voted on Question 1, 52% were in favor of the tax and 48% voted against.
This ballot question approved the adoption of an amendment to the Massachusetts state constitution that was already twice approved by the state Legislature in 2019 and again in 2021. Starting with the tax year that begins on January 1, 2023, the Amendment will impose an additional 4% state income tax on a Massachusetts resident’s annual taxable income in excess of $1 million. The threshold for imposition of the extra 4% tax will be adjusted annually for inflation. The tax is expected to affect only 0.6% of Massachusetts households.
The tax revenue raised by this extra 4% tax, estimated at $1 to $2 billion annually, will be used, subject to appropriation by the Legislature, for public education (including public colleges and universities) and transportation (repair and maintenance to roads, bridges, and public transportation.
If income from any source, including wages, interest, dividends, income from the sale of a home or business, and long and short-term capital gains, exceeds $1 million, the portion in excess of $1 million will be taxed at 9% (the standard Massachusetts income tax of 5% plus the additional 4% tax on income in excess of $1 million). Because Massachusetts taxes short term capital gains at 12%, the effective new tax rate on this income will be 16%.
For the typical Massachusetts resident, the sale of a home may be the most likely reason you would have $1 million of income in one year, in the form of capital gain realized on the sale of your home. It is important to keep in mind that you do not pay capital gain tax on the entire sale price of your home. First, capital gain is calculated by subtracting your “basis” in your home from the sale price. Your basis is the price you paid for the property, plus any capital improvements you have made to the property over the course of your ownership. If an owner of the property has died, the basis in the property receives a so-called “step-up” in basis to the value of the property on the date of the owner’s death, which will reduce the capital gain when the home is sold.
Second, keep the capital gain exclusion in mind. A single individual can exclude up to $250,000 of capital gain from tax if they sell their primary residence and have owned and lived in the home for two of the last five years prior to the sale. Married couples can exclude $500,000 of capital gain from tax if one or both of them owned the home and both of them resided in the home for two out of the last five years. A deceased spouse’s capital gain exclusion can continue to be used up to two years after their death if the home is sold during that time and the surviving spouse has not remarried. If a homeowner has moved to a care facility and lived in the home for at least one year during the five years prior to sale, the time spent living in the care facility can be used toward the two-year residence requirement.
Once the final regulations applicable to this tax are finalized its impact may be better understood, and with it the ways in which the tax may be minimized by proper tax planning. In the meantime, if you anticipate a taxable event such as the sale of a home or business that will result in more than $1 million of income, consult your income tax advisor to understand how this new tax will impact you, and to determine if there are ways to reduce its impact.
Maria Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and the immediate past President of the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. For more information, visit www.ssbllc.com or call (781) 461-1020. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.