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State Tax Tips for Millionaires

Updated for Tax Year 2014


If you happen be among this country's 1 percent of wealthiest Americans, you should be aware of a few tax rules that are helpful to those with your level of income.

If you happen be among this country’s 1 percent of wealthiest Americans, you are in the highest tax bracket. A number of tax benefits — such as Roth IRAs, for one — are not available to those in this high-earning category. Still, you should be aware of a few tax rules that are helpful to those with your level of income.

The states of affairs

As the remnants of the economic recession that ended in the summer of 2009 continued to ripple through the U.S. economy, a handful of states implemented a “millionaire tax” aimed directly at high earners.

“The millionaire tax is designed to ‘catch’ the higher earners that the legislatures feel are not paying their fair share,” said Tim Gagnon, a certified public accountant who teaches at Boston's Northeastern University. “Most millionaires receive much of their income from investments, which do not always get assessed the additional rates and surcharges.”

There are 11 states that have adopted the millionaire taxes.

In California, high earners are taxed 9.3 percent plus an additional 1 percent surcharge on income over $1 million (this, and all millionaire taxes, are over and above the standard federal tax bracket that applies).

On the opposite coast, New York’s upper class is taxed 8.97 percent on income over $500,000 through Dec. 31, 2014. And taxpayers with an adjusted gross income of more than $1 million are prohibited from claiming itemized deductions -- except for 50 percent of their federal charitable contributions.

Hawaii taxes its rich 11 percent on all income over $300,000, and Rhode Island imposes a 5.99 percent tax rate on income over $125,000. Connecticut, Maryland, New Jersey, North Dakota, Oregon, Vermont and Wisconsin round out the “millionaire tax” states, each with varying rates and income caps.

Nine states have no income tax. They are Washington, Nevada, Wyoming, South Dakota, Vermont, Tennessee, Texas, Florida and Alaska. Claiming a summer home located in one of those states as your permanent residence won’t necessarily help, says Gagnon.

“If you try to renounce (your residency) to avoid taxes, there are many instant taxes that are triggered," he said, "so it is not a viable way to avoid the millionaire tax."

"The millionaire tax is designed to ‘catch’ the higher earners that the legislatures feel are not paying their fair share."

- Tim Gagnon, CPA and Northeastern University instructor

Give a little (OK, a lot)

In addition to the obvious advantages to being wealthy, there are a few tax-related benefits. While you might not be able to claim the standard deductions available to most taxpayers, Uncle Sam does provide you with several options tailored for your needs.

“People with higher incomes tend to be involved in more business and investment activities, so they are able to take advantage of the breaks and deductions that are in place for all taxpayers who participate in those activities,” said Karen Reed, spokeswoman for Citrus Heights, California-based Tax Resources Inc.

When a majority of the income for high earning taxpayers comes from wages, the "ordinary," i.e. higher, income tax rates come into play, which means that compensation and other "ordinary" income over certain levels is taxed at 35 percent for the highest bracket. However, Reed adds that if income is mainly from long-term investments, as is the case for many millionaires, the highest rate at which it is taxed is only 15 percent.

And because you can afford to “give back” financially to your favorite causes and charities, Reed says there are ways you can almost “triple up” on tax benefits by donating appreciated stock through charitable contributions.

“When appreciated stock that is held over a year is donated directly to a charity, the taxpayer does not have to pay taxes on the gain from the stock, but is also allowed to claim the full fair market value at the time of the donation as a deduction,” Reed said. “The third benefit of this strategy is that the dividends these stocks pay while owned are taxed at a lower rate.”

And purchasing that expensive home ends up being a smart move tax-wise as well. Reed says millionaires are allowed to deduct unlimited amounts of real estate taxes, which means the more you pay for a home, the greater the deduction.

She explained that you may deduct interest on up to $1.1 million in home acquisition debt for your primary home and a vacation home.

The alternative

While being a high-earning investor in this country has its obvious benefits, experts do caution there can be a slightly negative tax repercussion from it as well. Some are subject to the alternative minimum tax (AMT), which is a flat-rate charge on the adjusted amount of taxable income above a certain threshold. The exemption is substantially higher than the exemption from regular income tax.

“Many high-income taxpayers, or millionaires, do not pay alternative minimum taxes if their income is strictly wages," said Dave Du Val, vice president of tax services at Tax Resources Inc. "Some millionaires end up paying AMT because their tax rate is so low due to the special tax rates for investment income.”

Du Val warns that once a taxpayer is “in” AMT, it is generally impossible to lower taxes if the tax year has ended and additional planning cannot be done.

Reed noted, however, that although it currently doesn’t apply, an exemption phase-out, as well as limitations on itemized deductions for high-income taxpayers, may be reinstated for high-income taxpayers in 2014.

“The only real way to 'deal' with these challenges," she said, "is through vigorous tax planning throughout the year.”

A few disadvantages

While millionaires have available a number of tax perks, they are excluded from many others because of their higher tax bracket.

“Certain deductions are subject to income thresholds,” said Karen Reed, spokeswoman for Citrus Heights, California-based Tax Resources Inc. “For example, medical expenses are only deductible to the extent that they exceed 10 percent of income for 2014, so it is difficult for high-income taxpayers to qualify to deduct their out-of-pocket medical costs.”

There is a temporary exemption from Jan. 1, 2013 to Dec. 31, 2016 for individuals age 65 and older and their spouses. If you or your spouse are 65 years or older or turned 65 during the tax year you are allowed to deduct unreimbursed medical care expenses that exceed 7.5% of your adjusted gross income. The threshold remains at 7.5% of AGI for those taxpayers until Dec. 31, 2016.

Taxpayers in the highest tax brackets are also ineligible for any of the tax credits and deductions associated with higher education expenses — as well as for the generous tax advantages that lower income taxpayers receive from contributing to traditional and Roth IRAs — because of the income caps set by the federal government.

Additionally, the Foreign Account Tax Compliance Act, a new federal mandate requiring stricter reporting guidelines on foreign financial assets, often used by millionaires as a way to avoid paying taxes, began implementation in 2013.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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