What Is the Luxury Tax in Massachusetts?

In Massachusetts, a voter-approved change to the state constitution introduced what is known as the “luxury tax.” Officially called the Fair Share Amendment, this law went into effect for the 2023 tax year and established a new tax on high-income earners. It is not a tax on wealth or property, but an additional tax levied directly on annual income.

The measure imposes a 4% surtax on a taxpayer’s annual net income that exceeds one million dollars, in addition to the state’s existing income tax. The revenue is constitutionally dedicated to funding public education, roads, bridges, and public transportation. The one-million-dollar threshold is indexed to and adjusted annually for inflation.

Who is Subject to the Surtax

The 4% surtax applies to any individual, trust, or estate with Massachusetts taxable income exceeding the annual threshold. For the 2023 tax year, this threshold was set at $1,000,000. Due to inflation adjustments, the threshold increased to $1,053,750 for the 2024 tax year and is set at $1,083,150 for 2025.

A specific rule governs how married couples are treated. The income threshold applies to a couple’s combined income and is not doubled for joint filers. For example, if a married couple filing a joint return has a combined net income of $1.5 million, they are subject to the surtax. The single threshold applies whether the couple files jointly or separately.

Beginning with the 2024 tax year, a regulation requires married couples who file a joint federal income tax return to also file a joint Massachusetts income tax return. This change eliminated a previous strategy where couples could file separately at the state level to keep each individual’s income below the surtax threshold. Now, the surtax is calculated based on the couple’s total joint income.

Calculating the Surtax Liability

The calculation of the surtax is direct and applies only to the portion of income that surpasses the annual threshold. The tax is not applied to the taxpayer’s entire income, but exclusively on the amount over the inflation-adjusted mark for that tax year.

To determine the liability, a taxpayer first calculates their total net income. While Massachusetts has a general income tax rate of 5%, certain types of income, like short-term capital gains, are taxed at different rates. The surtax is calculated on a taxpayer’s total income from all categories combined. From this total net income, the annual surtax threshold is subtracted, and the 4% surtax is then calculated on the remaining amount.

For example, a taxpayer with a total net income of $1,400,000 in a year where the threshold is $1,053,750 would have their surtax calculated on $346,250 ($1,400,000 – $1,053,750). The surtax liability would be 4% of this amount, resulting in a tax of $13,850.

Navigating One-Time Income Events

Many taxpayers may find their income pushed above the surtax threshold due to a significant one-time event, most commonly the sale of a primary residence. The amount of income subject to the surtax from a home sale is based on the taxable capital gain, not the total sale price. Massachusetts follows federal rules regarding the capital gains exclusion on a primary residence.

Under Section 121 of the Internal Revenue Code, taxpayers can exclude a substantial portion of the capital gain from the sale of their main home. A single filer can exclude up to $250,000 of gain, and a married couple filing jointly can exclude up to $500,000. To qualify, the owner must have owned and used the property as their principal residence for at least two of the five years preceding the sale. This exclusion is applied first, reducing the amount of gain that is considered taxable income.

Consider a married couple who sells their primary home for $2.2 million. With a cost basis of $700,000, their total capital gain is $1.5 million. Because they meet the residency requirements, they can apply their $500,000 joint filer exclusion, which reduces their taxable gain to $1,000,000. This amount is added to their other annual income to determine if they cross the surtax threshold.

This same principle of calculating taxable gain applies to other large, non-recurring events, such as the sale of a business or other significant capital assets. The gain from these sales is included in the taxpayer’s total net income for the year.

Reporting and Paying the Tax

Reporting and paying the surtax involves annual filing and, in many cases, making quarterly estimated tax payments. Taxpayers who anticipate their income will result in a tax liability of more than $400 on income not covered by withholding are required to make estimated payments to avoid underpayment penalties.

These estimated payments are calculated using the worksheet on Form 1-ES, Massachusetts Estimated Income Tax, and must incorporate the 4% surtax. Payments are made in four installments with due dates around:

• April 15
• June 15
• September 15
• January 15 of the following year

All payments related to the surtax must be made electronically. At the end of the tax year, the surtax is reported on the standard Massachusetts personal income tax return, Form 1 for residents. The final return and any remaining payment are due by the standard tax filing deadline, typically April 15.