The Massachusetts Millionaire Tax: Could a Loophole Cost the State Millions?

Remember the Millionaire Tax?

Last fall, we wrote about an amendment to the state constitution intended to raise state revenue without impacting lower-income taxpayers. The amendment passed with 52% of the vote in November and went into effect on January 1, 2023.

Now it’s back in the news as the Mass Budget and Policy Center has published a report claiming the state could lose between $200 million and $600 million in potential tax revenue if a critical loophole isn’t fixed.

What Is the “Millionaire Tax”?

Up until this year, the Massachusetts Constitution required a single tax rate for all personal income, making it difficult to raise the income tax without disproportionately impacting lower-income taxpayers. As a result, Massachusetts taxpayers paid a flat 5% tax on all earned (salaries, wages, tips, commissions) and unearned (interest, dividends, and capital gains) income.

The Massachusetts Millionaires Tax (MMT) is an amendment to the state constitution that levies an additional 4% state income tax on annual, personal taxable income over $1 million. The funds raised from this tax are slated for use in public education and transportation.

Proponents of the MMT have estimated that it will bring as much as $2 billion in new funding to the state. Detractors, however, have argued that it could have a negative impact on the state economy by causing taxpayers to move to other states or seek out new ways to minimize their overall tax liability.

How the Millionaire Tax “Loophole” Works

At the time it was passed, researchers suggested that the tax could have a negative impact on state income because it would incentivize high-income state residents to seek out ways to reduce their taxable income.

While it remains to be seen if high-income taxpayers begin to leave the state at higher rates, the Massachusetts Budget and Policy Center recently published a report claiming that a simple and legal loophole in the law could cost the state up to 20% of the anticipated new revenue.

Quite simply, married couples filing jointly who have a combined household income of over a million dollars can file jointly at the federal level and singly at the state level. Filing jointly at the federal level allows them to take advantage of a higher standard deduction and other benefits. Filing singly at the state level, however, allows each partner to file their own separate $1 million exception instead of a single exemption applied to both.

Take a case in which each spouse earns $750,000 for a combined income of $1,500,000. If they file jointly at the state level, they’ll pay $50,000 on the first million dollars of income and another $45,000 on their income over a million, for a total of $95,000. By filing separately, however, each spouse will pay only $37,500, for a savings of $20,000.

The Proposed Fix

Many states require couples who file jointly on their federal tax returns to file jointly on their state returns. Now there are calls for Massachusetts to join them. Rep. James O’Day and Sen. Jason Lewis have sponsored “An Act to Prevent High-Income Tax Avoidance” (HD.2310/ SD.1167), a bill that would require “A married couple must file a joint return for any year in which they file a joint federal income tax return.”

Stay in the Loop!

We don’t yet know whether the current bill to close the loophole will pass, or in what form—but we do know that a qualified CPA can help. The CPAs at Tonneson keep a close eye on changes to state and federal tax law to ensure that our clients maximize their tax savings while following the law. Contact us today.

Contact us at Tonneson + Co today to learn how we can help.