Written by: Jonathan C. Hitter, CPA, MST, CGMA and Angela Parziale, CPA, MST
The Massachusetts Millionaire’s Tax, a significant fiscal policy aimed at taxing the state’s wealthiest individuals, has become a pivotal factor for high-net-worth individuals (HNWIs) considering their residency status, especially those with real estate holdings across multiple states. As these individuals evaluate their future, particularly with retirement on the horizon, understanding the tax’s implications and the requirements for changing domicile becomes crucial. This article delves into the Massachusetts Millionaire’s Tax, its impact on HNWIs, and key considerations for those contemplating a move to another state.
Recap: The Massachusetts Millionaire’s Tax
The Massachusetts Millionaire’s Tax imposes an additional surtax on annual income exceeding $1 million, targeting high earners to contribute more to state revenues. This includes income from wages, investments, and certain capital gains, which can significantly affect HNWIs with diverse income sources, including real estate investments across states. To read more about the Massachusetts Millionaire’s tax, check out this article on our blog.
The Impact on High-Net-Worth Individuals
For HNWIs with real estate in Massachusetts and other states, the Millionaire’s Tax introduces complex considerations for tax planning and residency decisions. The tax affects their income and complicates decisions regarding where to declare residency, especially for those nearing retirement or planning to relocate. We recently put together an article that outlines strategies for easing the tax burden in light of this legislation; read it here.
Considering a Move: Domicile and Residency
The concept of “domicile” is central to understanding one’s tax obligations to Massachusetts. Domicile refers to where you intend to make your permanent home, where you return after being away. You can have multiple residences but only one domicile. For Massachusetts to recognize a change in domicile, thereby releasing an individual from the obligation to pay the Millionaire’s Tax, clear evidence demonstrating a permanent move must be provided.
Establishing a New Domicile
Contemplating a move from Massachusetts to retire in another state requires substantial planning and documentation to authenticate a change in domicile, especially if you retain real estate in Massachusetts. The process is far from straightforward and involves more than just ticking boxes on a checklist. It requires considerable effort and understanding that the transition is nuanced, involving various factors beyond the basic steps. The planning and documentation to prove the shift in domicile can include:
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- Physical Relocation: Moving one’s belongings and family to the new state.
- Changing Legal Documents: Updating your driver’s license, voter registration, and legal documents to reflect your new state of residence.
- Economic Ties: Shifting banking, investment accounts, and business interests to the new state.
- Social Ties: Joining clubs, religious institutions, and community organizations in the new location.
- Facts and Circumstances Test: Massachusetts employs a “facts and circumstances” test to assess domicile. This means the state will consider all aspects of an individual’s life to determine their domicile.
The Millionaire’s Tax Complication
Introducing the Millionaire’s Tax adds a layer of complexity for HNWIs planning to change their domicile. The tax incentivizes the state to scrutinize claims of domicile change more closely, given the potential loss in tax revenue. This scrutiny means that individuals must diligently establish and document their ties to a new state. The Department of Revenue is intensifying its efforts to verify or refute claims. For instance, they examine data from external sources, including E-ZPass and telephone records.
Key Considerations
Massachusetts residents who own real estate in other states but wish to keep a residence in Massachusetts due to family connections must exercise caution. It’s possible to be considered domiciled in Massachusetts and, as a result, be obligated to pay taxes in the state.
For those contemplating a move, it is vital to:
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- Plan Ahead: Begin the domicile change process well before the move to ensure all documentation and changes reflect your new state of residence.
- Maintain Records: Keep detailed records of all steps to establish a new domicile, including receipts, memberships, and any other evidence of a permanent move.
- Consult Professionals: Work with tax and legal professionals specializing in multi-state residency and tax planning to navigate the complexities of the Millionaire’s Tax and ensure compliance.
Conclusion
If you’re contemplating a change in residency, understanding the complexities of being deemed domiciled in Massachusetts based on facts and circumstances is crucial. It involves much more than simply ticking off items on a checklist, such as changing your address or doctor. The effort required is substantial and encompasses a wide array of considerations that go beyond the superficial aspects of relocation. It’s not a straightforward process; it may necessitate a multi-year plan to establish residency in a new state fully.
Additionally, it’s important to remember that other states have their own specific criteria for determining residency, nexus, and domicile. These factors can significantly impact your tax obligations and legal residency status. Given these complexities, you may want to thoroughly reassess your relocation plans, ensuring you fully understand the implications and commitments of such a significant decision.