Massachusetts Voters Approve the ‘Millionaires Tax’

massachusetts capital gains tax rate

For decades, moreover, a property tax limitation regime has kept property tax collections in check, even as they have risen dramatically elsewhere in the region. Today, while no one would mistake Massachusetts for a low-tax state, it has carved out a place as a competitive area to live and work within the Northeast corridor. Income in excess of $1 million from such a sale after December 31, 2022, will be taxed in Massachusetts at nearly double the rate (9 percent vs. 5 percent) than would apply if the sale occurred prior to 2023. It might also convince those taxpayers to sell their company or real estate between now and the end of the year. In June 2021, the Massachusetts legislature voted overwhelmingly to approve a proposed constitutional amendment commonly known as the Millionaires’ Tax, or the Fair Share Amendment. The Millionaires’ Tax would impose a 4% additional tax on income in excess of $1 million effective Jan. 1, 2023. The legislature’s approval of the amendment allows it to appear on the Nov. 8, 2022 general election ballot.

massachusetts capital gains tax rate

Second, if your taxable income, including the capital gains, is less than $37,650 for a single person and $75,300 for a married couple , there’s no federal tax on capital gain. But beware that the capital gains will be included in the calculation and could put you over the threshold. Third, if your income is more than $415,050 for a single person and $466,950 for a married couple , the federal capital gains tax rate is 20%, bringing the combined federal and Massachusetts rate up to just over 25%. 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%. This effectively set up a flat tax in Massachusetts on each category of income, regardless of the total income that a taxpayer has during the course of the year. This contrasts with the federal system, and the systems in many states, which rely on progressive tax rates that increase as a taxpayer’s own income rises.

How Much Is Capital Gains Tax? All the Details You Need

Wages and most investment income subject to the tax will be taxed at a 9% rate, rather than the current 5% rate. There are instances when the capital gains tax rate is 5.1%, but those rates specifically apply to different schedules. The qualifying capital assets for this rate are small business stocks, interest on savings deposits to banks, and interest loans from pawnbrokers. If you live in the home for at least 2 of the last 5 years before selling it, you may qualify.

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Thus, it would be relatively easy for producers and consumers to adjust their behavior and location to avoid a new 4 percent income surtax. A small business subject to the tax, that might benefit from Massachusetts’ qualified workforce, can more easily relocate to another state, knowing that it can draw from a workforce spread out across the country.

The Economic Ramifications of High-Rate Income Taxes

Although Massachusetts’ overall tax competitiveness ranks below the median, the individual income tax is one bright spot for the Commonwealth. If the 4 percent surtax is approved, Massachusetts’ tax competitiveness will plummet—not just regionally but nationally.

Thus, it seems safe to assume that the DOR will place an emphasis on reviewing tax returns filed by taxpayers who have historically filed resident tax returns but suddenly claim nonresident status in the wake of the millionaires tax. Changing one’s domicile is possible, but taxpayers should understand that they bear the burden of proving they have changed their domicile and that they would be well advised to consult with an attorney before making the move. Where the income is earned by an S corporation with at least $6 million of gross receipts, the income will be subject to an additional 2%-3% entity-level ‘sting tax’ before the income passes up to the individual owner.

Benefits (Mass. and Federal Excluded Income)

If you are in a position where you are feeling nervous about paying capital gain taxes after selling your home you may be exempt from this policy. It’s a common misconception that taxes are due on the sale price of a property or the money you receive in cash from the sale. Taxes actually only apply to the “gain” or profit from the sale. In its simplest form, you take the sale price and subtract the tax basis to determine the gain. So, if you sell a property for $400,000 and the tax basis is $250,000, then you owe tax on the $150,000 gain. I do not think that the addition of a capital gains tax in the state of Washington would have much of a bearing on whether other states decide to impose one. The other considerations (political, financial, etc..) on whether to impose a state-level capital gains tax are likely more important.

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.

To qualify, you must have lived in and owned the house for at least two out of the five years prior to the sale. For instance, if you lived in the house from 2012 to 2014 and owned it from 2014 to 2016, but rented it out, you could still qualify for the exclusion. If you are a nursing home resident, the two-year requirement is reduced to one year.

Why Realized

An extension to file a return doesn’t extend the due date for paying any tax due. If you have an eligible gain as a taxpayer, you may contemplate deferring and even eliminating those gains somewhat through investment in qualified opportunity funds. Personal state programs are $39.95 each (state e-file available for $19.95). Most personal state programs available in January; release dates vary by state. Darrow Wealth Management is afinancial fiduciary and fee-only massachusetts state income tax registered investment advisor in Boston and Needham, MA. We specialize in financial planning for an IPO, acquisition, or sale of a private business. Although we don’t provide legal or tax advice, through ongoing financial advice and asset management, we aim to help our clients make the most of a sudden wealth event. Article is a general communication only and should not be used as the basis for making any type of tax, financial, legal, or investment decision.

What are capital gains?

According to the IRS, “Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss.”

Where that tipping point is varies by firm and individual. But when the benefits of residing within a high-tax jurisdiction no longer outweigh the costs, taxpayers seek relief in more tax-competitive jurisdictions. The relocation of General Electric from Connecticut illustrates this point. The graduated income tax amendment is likely to exacerbate the net outmigration of AGI from Massachusetts as taxpayers adjust their behaviors to the tax increase. The graduated income tax amendment would be paid by many small businesses, in addition to wealthy individuals.

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