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What is a millionaire tax?

Young man lying on a hammock while perusing work documents in his backyard at home

As state tax policies evolve, high-income earners are facing a new reality: Where you live and how your income is structured may play a larger role in long-term financial outcomes.

A millionaire tax is a state-level tax applied to income above a defined threshold, often $1 million or more. Rather than taxing all income at a higher rate, it typically applies only to the portion earned above that threshold, and the structure can vary significantly by state.

Even for those not directly affected today, these policies reflect evolving approaches to taxing high-income individuals at the state level.

 

A growing trend across states

The state of Washington’s recently signed “millionaire tax” is one of the latest examples of a broader trend. Massachusetts has introduced additional surtaxes on income above $1 million, including a 4% surtax on taxable income exceeding that threshold.¹ California continues to maintain some of the highest marginal tax rates in the country with top marginal rates reaching 13.3% for high-income earners.² In New York, state policymakers have explored additional taxes on high earners to help address budget gaps, including proposals to increase top income tax rates.³  While each approach differs, the overall direction is consistent as states look for additional sources of revenue.

 

Washington State case study: Timing and planning considerations

Washington’s new law offers a clear example of both impact and opportunity. The state has introduced a 9.9% tax on income above $1 million, with implementation scheduled for 2028. It represents the state’s first tax of this kind and is intended to support public programs such as education and tax relief.

According to the Governor’s office, the tax applies only to income above $1 million and is expected to affect a relatively small percentage of residents.

What stands out is the timing. With several years before the law takes effect, high earners have time to evaluate how their financial decisions today could shape future outcomes. That may include reviewing when income is recognized, how business or investment income is structured, and how estate planning strategies fit into a broader plan.

At the same time, uncertainty remains. Like many state-level tax changes, the law could face legal or political challenges before full implementation.

 

How state taxes can influence long-term strategy

State-level tax changes can affect more than annual income. They can influence how high earners think about where they live, how they structure their wealth, and when they make key financial decisions.

For some, this may raise questions around residency and domicile, particularly if they maintain ties to more than one state. For others, it may influence how compensation is structured, especially when income includes bonuses, equity, or business distributions that can vary from year to year.

These considerations are rarely driven by a single policy change. Instead, they tend to reflect a broader evaluation of how tax exposure, lifestyle preferences, and long-term goals align. As more states explore taxes on high earners, that evaluation may become a more consistent part of financial planning conversations.

 

Why this matters beyond one state

Washington’s approach is one example of how state tax policy is changing and how quickly those changes can spread. As similar policies are considered elsewhere, high earners may find that tax exposure is influenced not only by location, but also by how income and assets are structured.

For business owners, executives with equity compensation, and investors with variable income, taxes depend not only on where they live, but also on how and when they get paid. As more states explore similar policies, tax considerations can become a more prominent part of long-term financial decision-making.

 

How to approach taxes in  financial planning

A reactive approach can limit options, while a more proactive approach can create flexibility and allow for more deliberate decision-making.

1. Time income strategically

Consider how timing affects income

The timing of when income is recognized can influence overall tax exposure. High earners may want to better understand how different types of income—such as bonuses, equity compensation, or investment gains-are treated under changing tax rules

2. Diversify assets with intention

Different asset types are taxed in different ways. A well tax-diversified portfolio can help align income with long-term goals, improve after-tax outcomes, and reduce unnecessary tax exposure.

3. Integrate estate planning early

Estate planning is not only about transferring wealth in the future. It can also influence current financial positioning. Gifting strategies, trust structures, and coordinated wealth transfer approaches can all play a role.

Consider life insurance in wealth planning

Life insurance can serve multiple purposes within a broader financial strategy. In addition to providing protection, it may offer tax-advantaged growth potential, support liquidity needs within an estate, and help facilitate more efficient wealth transfer.

One commonly used approach is an irrevocable life insurance trust (ILIT). An ILIT is designed to own a life insurance policy outside of your taxable estate. When structured appropriately, it may help keep death benefits outside the estate, preserve more wealth for beneficiaries, and provide liquidity to address estate-related expenses.

 

Bringing it all together

Tax policy changes can introduce complexity, but they also create an opportunity to reassess how income is timed, how assets are structured, and how wealth is positioned for the future. Washington’s upcoming tax is one example of how quickly the landscape can shift and why reviewing your strategy before changes take effect can make a stark difference.

 

FAQs

A millionaire tax is a state-level tax applied to income above a high threshold, typically $1 million, often as an additional surcharge.

States such as Massachusetts and California have higher taxes on top earners, and others are exploring similar policies.

Washington’s law introduces a 9.9% tax on income above $1 million, scheduled to take effect in 2028.

Life insurance offers income-tax free death benefit to beneficiaries and offers tax-advantaged cash value growth and, when used as part of a broader strategy, can help address estate-related tax considerations.

An ILIT is a structure that holds a life insurance policy outside of your taxable estate to help preserve wealth for beneficiaries.

 

As tax policies continue to evolve, reviewing your financial strategy can help ensure it reflects both current conditions and what may lie ahead. A financial professional can help you assess how changes like these may affect your overall plan and identify strategies that align with your long-term goals.

 

This article is for informational purposes only and is not intended as tax, legal, or accounting advice. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Consult with qualified professionals regarding your individual situation.

Reference articles:

Forbes Washington State’s 9.9% Million ‘Millionaires Tax’ Signed Into Law

Governor Ferguson signs Millionaires’ Tax into law | Governor Bob Ferguson

 

Footnotes:

1Massachusetts Department of Revenue – 4% surtax on income over $1 million
https://www.mass.gov/info-details/massachusetts-4-surtax-on-taxable-income

2California State Income Tax Brackets and Rates for 2024–2025
https://virtuecpas.com/california-state-income-tax-brackets/

3State legislators gear up for budget fight with one-house proposals
https://www.cityandstateny.com/policy/2026/03/state-legislators-gear-budget-fight-one-house-proposals/412024/