Massachusetts High-Income Tax Strategies (2026)

Why Massachusetts Changed for High Earners

Massachusetts implemented a 4% "millionaire surtax" on income above a threshold indexed for inflation. For tax year 2026, the threshold is approximately $1,107,750 for all filing statuses.

This brings the effective top Massachusetts rate to 9% (5% base rate plus 4% surtax on income exceeding the threshold). Combined with federal tax at 37%, high earners face a 46% marginal rate.

The Surtax Mechanics

The surtax applies to all income above the threshold in a single year, including one-time events. A business sale, large capital gain, or major equity vesting can push income above the threshold and trigger the surtax on the excess.

Example: Business owner with $1.1 million in ordinary business income sells an investment property, realizing a $1 million gain. Total income: $2.1 million.

• Income below threshold ($1,107,750): Taxed at 5% Massachusetts rate
• Income above threshold ($992,250): Taxed at 9% Massachusetts rate (5% + 4% surtax)
• Massachusetts tax: ($1,107,750 × 5%) + ($992,250 × 9%) = $55,387.50 + $89,302.50 = $144,690
• Federal tax at 37% on $2.1M: $777,000
• Combined tax: $921,690
• Effective combined rate: 43.9%

Capital Gains

Massachusetts taxes capital gains as ordinary income at the same surtax rates. This means investment gains, real estate sales, and business dispositions are all subject to the surtax if income exceeds the threshold.

Core Strategies for Massachusetts High Earners

1. Managing the Surtax Threshold

The most valuable strategy for Massachusetts high earners is managing total income relative to the surtax threshold.

Timing and Spreading Income

Large gains can be spread across multiple years to reduce exposure to the surtax:

Example: Business Sale

Business owner plans to sell a business with a $3 million gain. Ordinary business income is $800,000 annually.

All gain in one year (2026):

• Total income: $3,800,000
• Surtax on: $3,800,000 - $1,107,750 = $2,692,250
• Surtax amount: $2,692,250 × 4% = $107,690
• Federal tax: 37% × $3,800,000 = $1,406,000
• Massachusetts base tax: 5% × $3,800,000 = $190,000
• Total state tax: $190,000 + $107,690 = $297,690
• Combined federal and state: $1,703,690
• Effective rate: 44.8%

Gain spread over three years (2026-2028) via installment sale:

• Year 1: $800,000 + $1,000,000 gain = $1,800,000 income
  • Surtax: ($1,800,000 - $1,107,750) × 4% = $27,690
  • Combined tax: (5% + 37%) × $1,800,000 + $27,690 = $765,690
• Year 2 and Year 3: Same calculation
• Three-year total tax: $2,297,070
• Single-year total tax: $1,703,690
• Savings from spreading: $593,380

This represents a 25.8% reduction in total tax by spreading the gain.

Bunching Charitable Giving

Offsetting high-income years with charitable deductions reduces income subject to the surtax:

Example: High earner with $2.5 million in income (due to business sale) donates $500,000 to charity:

• Reduced taxable income: $2,000,000
• Surtax on: $2,000,000 - $1,107,750 = $892,250
• Surtax savings from donation: ($892,250 - $392,250) × 4% = $20,000
• Plus deduction benefit at marginal rate: $500,000 × (5% + 37%) = $210,000
• Total benefit: $230,000

2. Pass-Through Entity Tax (PTE) Election

Massachusetts offers a PTE election for businesses to pay state tax at the entity level, deductible federally as a business expense.

Worked Example: $4M Pass-Through Entity with Surtax

S-corp with $4 million in taxable income, Massachusetts resident owner:

Without PTE election:

• Surtax on income over $1.107M: ($4M - $1.107M) × 4% = $115,572
• Base Massachusetts tax: 5% × $4M = $200,000
• Total Massachusetts tax: $315,572
• Federal tax: 37% × $4M = $1,480,000
• Combined: $1,795,572

With PTE election:

• Business pays Massachusetts tax: $315,572 (deducted federally)
• Federal tax on $3,684,428 remaining income: $1,363,238
• Combined: $1,678,810
• Tax savings: $116,762 annually

3. Real Estate Strategies

Cost segregation, short-term rental, and REPS strategies all reduce Massachusetts taxable income and can help manage the surtax threshold.

Example: Cost Segregation on $6M Property

Investor acquires $6 million apartment complex. Cost segregation reclassifies $1 million to 5/7-year property.

With 100% bonus depreciation: Year 1 deduction = $1,000,000

For an investor with $2 million in ordinary income realizing a $2 million gain (total $4 million):

• Without cost segregation: Surtax on ($4M - $1.107M) = $115,572
• With cost segregation (reduces income to $3M): Surtax on ($3M - $1.107M) = $75,572
• Surtax savings: $40,000

Appreciation and Charitable Giving

Donating appreciated securities to a donor-advised fund in high-income years provides dual benefits:

1. Charitable deduction offsetting surtax exposure
2. Avoidance of capital gains taxation on appreciation

Example: Business owner realizes $2.5 million in capital gains, plus has $1.5 million in ordinary income (total $4 million income). Donates $800,000 of appreciated stock (with $300,000 unrealized gain) to DAF:

• Charitable deduction: $800,000
• Reduced taxable income: $3,200,000
• Surtax on ($3.2M - $1.107M) = $84,372 vs. $115,572 without donation
• Surtax savings: $31,200
• Capital gains tax on $300,000 appreciation: 46% × $300,000 = $138,000 (avoided)
• Total benefit: $169,200

How Crescendo Helps Massachusetts High Earners

Crescendo helps plan around the surtax threshold and coordinate implementation with CPAs and advisors, particularly in years with liquidity events. Educational only, not personalized advice. Work with your CPA and attorney.