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Planning with the Massachusetts Millionaires Tax

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With regard to its neighbors, only New Hampshire has a better overall Index ranking than Massachusetts. The individual income tax, in particular, is the cornerstone of Massachusetts’ tax competitiveness, reducing the cost of employment in the Commonwealth and increasing the return to labor. It helps offset high business tax costs and makes Massachusetts more attractive to high earners and entrepreneurs. This calculator estimates the average tax rate as the federal income tax liability divided by the total gross income. Some calculators may use taxable income when calculating the average tax rate. Depending on your situation, there may be opportunity to establish irrevocable New Hampshire trusts and avoid state income tax on ordinary income or capital gains, but not on Massachusetts-sourced income.

Who pay capital gains tax?

In general, anyone who has sold a capital asset and made a capital gain has to pay tax on the gain. There are some exceptions, such as selling your primary home or finding ways to defer capital gains tax, but almost every capital gain will eventually be taxed.

Question 1 does not explicitly state how it applies to trusts, and we await guidance on this front. A “grantor trust” is treated as being disregarded for income tax purposes and the grantor is responsible for paying all of the taxes on its income. It typically pays tax on its capital gains, while other types of income are taxable to the beneficiaries or the trust . Taxpayers can carefully manage their discretionary income, such as by monitoring the timing of the sale of investments at a gain and by harvesting capital losses wherever 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.

Planning with the Massachusetts Millionaires Tax

Similarly, the massachusetts state income tax system is one of many factors that people take into account when determining where to live or where to locate a business. They care about crime rates, school quality, access to infrastructure, weather, human capital, and a host of other issues. For instance, New York features undeniably high taxes, to the point that recent governors—no foes of progressive taxation—have urged caution or even endorsed significant tax reform and tax relief. Many people are willing to pay high taxes for the privilege of easily accessing a city with global influence and accessibility. Because the proposed tax would be written into the constitution, it does not give the legislature the ability to introduce additional brackets without going back to the voters at least once more for that authority. The simple examples above only illustrate the state tax impact, but federal tax implications will also apply.

You may also qualify for certain personal income tax credits, which can reduce the amount of tax you owe. Article 44 of the MA Constitution requires that the same class of income must be taxed at the same rate. This is the reason why there are different classes of income and why MA cannot have a graduated income tax rate.

Massachusetts Tax Rates

Massachusetts relies heavily on the taxation of personal income to fund annual operating expenses, collecting approximately 55% of all tax revenues from this source. The Commonwealth taxes both earned through the withholding tax and investment income. The tax rate was lowered to 5% for tax years beginning January 1, 2020, and after. Massachusetts has a flat rate, meaning that all income of the same types must be taxed at the same rate, but different income types can be taxed differently. Over the past two decades, Massachusetts has largely shed its historic moniker of Taxachusetts. This is primarily due to the reductions in its corporate and individual income tax rates.

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Certain deductions, such as the deduction for short-term losses under G.L. 62, § 2, reduce Part A gross income in determining Part A adjusted gross income. 62, § 3, reduce Part A adjusted gross income to arrive at Part A taxable income. These deductions apply to Part A income in the aggregate, with no differentiation between interest, dividends, short-term capital gains or gains on collectibles. Question 1 formally amends Article 44 of the Massachusetts constitution, which required tax to be levied at a uniform rate upon income derived from the same class. For example, the tax rate in Massachusetts for wages and for interest, dividends and long terms capital gains is 5% in 2022, while the rate on short term capital gains and long term gains from collectibles is 12%.

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