As the year draws to a close, let’s dive into some strategies for individual year-end tax plannings.
Effective January 1, 2023, Massachusetts short-term capital gain tax rate is reduced to 8.5% from 12%. However, Mass has also added a 4% millionaire tax – any income that is over $1M threshold will be taxed at an effective 9% tax rate instead of 5%.
Since 2023 is the first year this 4% surtax is implemented, (1) Mass will not consider this additional 4% surtax when determining whether an employer withheld sufficient tax when the employee would be subject to penalties or other consequences that could follow from the failure to withhold sufficient tax. (2) For 2023 estimated tax payments due by January 15, 2024, the 4% surtax will not be considered when determining whether there has been an underpayment of the estimated tax.
Any ways to avoid this 4% surtax?
First, it might make sense to file separate state returns with your spouse if both spouses have income. By filing separately, each spouse could earn their own $1M without triggering the 4% surtax. Note, 2023 is the only year that taxpayers may file separate Mass returns and a joint Federal return. Starting 2024, if taxpayers were to file separately for Mass, they would have to file separately for Federal as well, which could be less advantageous.
Second, charitable contribution deductions are allowed for Mass effective 1/1/2023, even if Federal does not itemize. However, they can only offset earned income, essentially, not interests, dividends or capital gains. If you are considering making charitable contributions, donating long term appreciated stocks would give you more tax savings, as you can take the fair market value of the donated stocks as your deduction without having to pay any capital gain taxes on the stock appreciation. If you plan to make a large charitable contribution in a single year, ask your financial advisor about setting up a Donor Advised Fund. With Donor Advised Fund, you can take the charitable deduction in the year you fund the account, but you may disburse the charitable account in future years.
Third, taxpayers may consider investments in Mass Municipal Bonds which are tax-exempt from Mass income tax, or Qualified Opportunity Zone investment which could reduce your taxable capital gain by deferring the gain to later years.
Fourth, you may transfer investment assets to a different state, such as setting up an irrevocable New Hampshire trust and hire a New Hampshire independent trustee, so the income generated in the trust are considered New Hampshire source. Bring it up to your trust and estate attorney to see if it will work for your situation.
Lastly, you may move out of Mass all together to a state with a lower income tax or even no income tax, such as Florida, Tennessee, Texas, Nevada, and Washington.
Schedule a call with your tax advisor at KN+S to explore your options. We are happy to help.
Lisha Jiang, CPA, is a Senior Tax Manager at Katz, Nannis + Solomon, P.C. If you have any questions or would like to speak with one of our tax professionals, please contact our office at 781-453-8700.