More States Considering New Surtaxes on Their Wealthiest Residents
The “Millionaire” Tax in Massachusetts went into effect on January 1, and less than a month into the New Year, in what is being called a coordinated effort, legislatures from seven more states are quick on their heels and planning to introduce similar legislation to increase taxes on their wealthiest residents. These states are rumored to include California, Connecticut, Hawaii, Illinois, Maryland, New York, and Washington. While their approaches will vary, all are likely to consider total income, investment income, capital gains, total net worth, or a combination of these.
In New York, Senate Bill S2162 has already been introduced, calling for capital gains of a married couple to be taxed an additional 15% on top of the approximately 10% current tax, for income above $1 million. Connecticut is considering a 5% surtax on capital gains for individuals making over $500,000, increasing the rate to 20% for capital gains over $100 million. Maryland legislative representatives say they support an extra 1% tax on certain capital gains for individuals in the state’s top tax bracket. California legislative representatives are looking towards an additional tax on individuals with over $1 billion in assets, in conjunction with an “exit” tax on those who try to leave the state to avoid the new “wealth” tax.
In view of the likelihood that at least some of these states, if not all, will follow in Massachusetts’ footsteps and succeed in passing some form of wealth tax, taxpayers should be looking now at the various strategies available in current tax law to help reduce their tax exposure. Incomplete Non-Grantor (“ING”) Trusts are one such strategy that may be appropriate for some taxpayers. ING trusts provide an opportunity to shift taxable income from a higher-taxed state to a lower-taxed state in certain circumstances without using any of the taxpayer’s gift or estate tax exemption. While this planning strategy is not suitable for everyone or free from risk, under the right circumstances it can greatly reduce or even eliminate state taxes on assets transferred.
If they advance, the above state tax proposals will have to go through the legislative process before becoming law.
Consult your Marcum tax professional to explore tax planning strategies that are appropriate for your circumstances.