The phrase “millionaire tax” conjures a clear mental image: someone with a yacht, a second home, and a net worth that most people will never approach. But the reality of how these taxes actually work is far more complicated and far more likely to affect people who don’t fit that picture at all. In states like California, Massachusetts, New York, and Washington, these taxes are triggered by a single year of income exceeding $1 million, regardless of your net worth or what you normally earn. That means a business owner selling a company they spent decades building, a professional with a strong bonus year and a few well-timed stock sales, or even a retiree whose tax-deferred balance has grown large enough to generate substantial Required Minimum Distributions could all find themselves in the crosshairs often without realizing it until it’s too late to do anything about it.
When you ask people, most support “taxing the rich.” That’s understandable. Arguably, even fair. After all, it’s mostly an extension of having a progressive tax system. And no, “progressive” here doesn’t mean the opposite of “conservative.” It means that as your income increases, your marginal tax rate also goes up, so you pay a higher portion of your income in taxes. At least, in principle.
For several years now, more and more states have added a “millionaire tax” to their tax code. This now includes high-tax states like California and New York, as well as nominally no-income-tax states like Washington.
And if, like me, you’ve never brought in over $1 million in a single year, it can seem like a non-issue. Whereas, if you do earn that much, asking you to pay a bit extra to support your less fortunate and often struggling neighbors, shouldn’t be very controversial.
But this framing misses some important details that can end up biting people who don’t fit that class of ultra-high-income earners. Maybe even you and me.
Key Takeaways
State millionaire taxes are triggered by a single year of high income — not by being wealthy or consistently earning seven figures.
Seven states and Washington, D.C. have enacted millionaire taxes that apply to annual income exceeding $1 million, regardless of your net worth or what you typically earn. A business sale, stock option exercise, large capital gain, or even a substantial bonus can spike your income into the target zone for a single year — leaving you paying a tax that was never intended for someone in your financial situation.
Stacking multiple income events in the same tax year is the most common — and most avoidable — way non-millionaires get caught by millionaire taxes.
No single transaction needs to exceed $1 million for you to trigger the tax. A combination of events — an options exercise, a portfolio rebalance, a partial business sale, and a strong bonus — can collectively push your taxable income over the threshold. Spreading these events across multiple tax years, when possible, is one of the most effective ways to avoid an unnecessary and outsized tax bill.
Even without a windfall, large tax-deferred retirement balances can force retirees into millionaire tax territory through Required Minimum Distributions.
Decades of maxing out traditional IRAs and 401(k)s can build balances large enough that IRS-mandated RMDs generate over $1 million in taxable income annually in advanced age — with no voluntary transaction required. Strategies like Roth conversions in lower-income years and carefully managed withdrawal sequencing, ideally begun years before RMDs start, can help reduce this late-life exposure.
What Is a “Millionaire Tax” and How Does It Work?
In most states, these taxes are set up as either a surcharge on income over $1 million or as one or more tax brackets that apply only to taxable income above $1 million.
This means that if your taxable income is under $1 million, you don’t pay this tax; even if you do have such a high income, only the portion over $1 million (or whatever higher bracket) gets taxed at the “millionaire tax” rate(s).
Why You Don’t Have to Be a Millionaire to Owe a Millionaire Tax
First and foremost, people normally think of “millionaires” as people with a net worth over $1 million (which, per DQYDJ.com, includes nearly 20% of American households).
But as described above, these “millionaire taxes” apply to income over $1 million, regardless of your net worth.
Normally, again per DQYDJ.com, this would apply to fewer than the top 1% of income earners in the US.
The problem is that you don’t have to earn that much consistently to be hit by these taxes. You could fall into this trap in a given year, even if:
- Your annual income is usually far lower than $1 million.
- Your net worth is far below $1 million.
- You don’t think of yourself as either wealthy or high-income.
Why?
Because these taxes look at your annual income separately every single year.
One-Time Income Events That Can Unexpectedly Trigger the Millionaire Tax
There are multiple ways that you could temporarily fall into this bucket, even if your income is normally below the threshold. Here are a few ways your income could exceed $1 million in a single year:
- You sell a 7-figure+ business.
- You exercise stock options with a high enough profit.
- You sell investments with a high enough appreciation.
- You receive a large enough bonus.
Any of these can spike your annual income in a single year high enough that you get caught by your state’s millionaire tax.
Table 1 shows seven states and one district where this matters most.
| Jurisdiction | Millionaire Tax Structure |
| California | 1% surcharge on income over $1M above already-high 9.3% base tax rate for high earners. |
| Maryland | New brackets, including 6.5% for income above $1M ($1.2M) for individuals (married filing jointly, MFJ); up to 0.75% higher than the old highest rate. |
| Massachusetts | A 4% surtax on annual income over $1M. |
| Minnesota | A Net Investment Income Tax of 1% on net investment income exceeding $1M. |
| New Jersey | Higher bracket, at 10.75%, for income over $1M. This is 1.78% more than the next-highest bracket. |
| New York | Higher bracket for income over $1.08M for individuals ($2.16M for MFJ), with two more brackets, 10.3% on income above $5M, and 10.9% above $25M. For NYC residents, this is in addition to city income tax rates of 3.078% to 3.876%, with the highest rate bracket starting at $50k for individuals (MFJ $90k). |
| Washington, DC | Highest tax bracket for income over $1M, taxed at 10.75%, 1% higher than the next-highest bracket. |
| Washington | A new tax levies 9.9% on income over $1M. This is in addition to a tax on high capital gains. |
And since the population of these eight is about 97 million, nearly 30% of the total US population, there’s a distinct chance that you’re at least potentially in the crosshairs.
How Stacking Income Events in One Year Creates an Unexpected Tax Problem
Even if no single event spikes your income high enough, if multiple such events happen in the same tax year, you’re hit.
Not many people ever sell a business for a 7-figure (or higher) payday, get a 7-figure bonus, or realize a 7-figure gain on an options or stock sale.
But what if two or more smaller versions of these stack on top of each other in the same tax year?
Perhaps your regular income is $200k; you realize $450k gains when exercising options; you rebalance your taxable portfolio, and realize another $250k in capital gains; and you sell part of a business you’ve been building for years, netting another $500k.
None of these is over $1 million, but combined, they exceed the $1 million tax threshold.
And if you’re, say, in Massachusetts, you get hit with that 4% surcharge on $400k, even if you don’t consider yourself wealthy or an ultra-high-income earner.
An extra $16k in state taxes may not sound like much. But that’s on top of the ~$70k you’d pay without the millionaire tax (even assuming none of your realized capital gains are short-term, taxed by Massachusetts at 8.5% or long-term gains from the sale of collectibles, taxed at 12%!), plus however much you pay the IRS.
Why Focusing Only on Maximizing Income Can Backfire at Tax Time
When it comes to finances, most people focus on:
- Increasing their compensation as much as possible.
- Getting the best price for their business.
- Maximizing the value of their stock options.
- Optimizing their investment portfolio allocations to meet long-term investment goals.
Focusing on just the immediate financial outcomes, without considering the tax impacts of timing, sets you up for potentially paying a tax for which you were never the intended target.
What the Wealthy Do Differently
Wealthy households, especially those with ultra-high incomes and who work with advisors, take a more holistic approach, addressing income timing as much as income maximization.
They don’t just ask if a financial move makes sense.
They also ask, if it does, when it would make the most sense to make it.
Instead of allowing large taxable incomes to stack in one year, they look for ways to:
- Spread large gains across multiple years.
- Avoid combining multiple major events in one year.
- Coordinate decisions across investments, compensation, and business activity.
This doesn’t eliminate or evade taxes.
What it does is minimize paying taxes at unnecessarily high rates and/or triggering excess taxes and fees, such as millionaire taxes or Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges.
The takeaway here is that millionaire taxes end up targeting not just their intended target, the ultra-wealthy, ultra-high-income earners. You can get caught up in the trap without being a millionaire or regularly earning 7 figures.
All it takes is having one or more special income-related spikes that push you into the target zone.
That’s where planning and timing make a difference.
How RMDs Can Push Retirees Into Millionaire Tax Territory
There’s another way you could fall into this trap, even with no mistimed income spikes.
Successful professionals with multi-6-figure incomes look for ways to shelter income from taxes throughout their careers. For example, by maxing out contributions to deferred-tax retirement accounts like traditional IRAs and 401(k) plans.
Over the course of a multi-decade career, with just a little good fortune and avoiding major investing mistakes, this can build into a multi-million-dollar tax-deferred balance.
Couple high tax-deferred balances with longer life expectancies, especially for wealthy, highly educated people, and Required Minimum Distributions (RMDs) may become another path into the millionaire-tax trap.
The IRS requires you to withdraw an ever-increasing percentage of your tax-deferred balances each year once you hit the RMD trigger age. The IRS provides the RMD factors (Table III on that website is most likely to be relevant) by which you divide your balance to show how much you must take out (and pay taxes on).
Table 2 below shows how that translates into “millionaire-tax danger zone” balances for certain older ages.
| Age | RMD Factor | Implied Balance for ~$1M RMD |
| 90 | 12.2 | ~$12.2M |
| 95 | 8.9 | ~$8.9M |
| 100 | 6.4 | ~$6.4M |
This matters because withdrawals from these accounts are treated as taxable income in the year when they’re drawn.
As a result, if your balance grows large enough and you’re old enough, you can fall into the millionaire-tax trap without any voluntary transaction or special income spikes.
No business sale, option exercise, stock sale, or poorly timed bonus.
Just a successful investing career and advanced age push you into the crosshairs.
No, not everyone reaches such advanced ages.
But it’s not all that rare.
According to data from the Social Security Administration’s actuarial life table:
- About 22% of men and 33% of women aged 67 live to age 90.
- Roughly 6.8% of men and 13% of women live to age 95.
- A smaller but still meaningful group reaches age 100.
Avoiding RMDs is hard, short of dying too young or being too poor, but good planning can mitigate things.
3 Strategies to Avoid the Millionaire Tax Trap
Here are 3 things you can do to reduce your risk and/or impact of getting caught up in a trap that isn’t meant for you, and paying needlessly high tax rates.
1. Spread Major Income Events Across Multiple Tax Years
As mentioned above, even if no single income spike is high enough to make you a target, enough individually low spikes can become an issue when combined in a single year.
To avoid this, when possible, spread large income events across multiple years. For example:
- Stagger options exercises.
- Sell assets in a tax-aware way, e.g., by selling losers along with winners.
- Time business transactions with care, e.g., spreading income over two or more years.
Not everything is within your control, but be mindful of what is.
Maximizing your financial gains is worthwhile, but always consider your after-tax benefit rather than just the pre-tax win.
Before pulling the trigger on a big transaction, ask yourself what the impact would be on your taxable income, and thus your taxes, for that year.
John Davis, CFP®, EA, founder of JKD Financial, says, “The most common ‘millionaire tax’ traps aren’t for the consistently wealthy; they’re for the everyday saver hitting a one-time liquidity event. I see this most often during the sale of a long-held family business or a massive Roth conversion intended to front-load tax liability in retirement. Events like these can skyrocket a taxpayer into their state’s highest bracket for a single year, even if their typical lifestyle doesn’t resemble a millionaire’s.
“The planning decision that makes the biggest difference in avoiding unnecessary state income taxes from income spikes is switching your focus from ‘annual tax’ to ‘lifetime tax.’ By intentionally managing a moderate level of tax liability every year, we avoid the massive, one-time spikes that trigger these surtaxes. However, when a spike is unavoidable, like a business sale, the best strategy is ‘winning in the margins.’ This means pairing that income with proactive offsets like Donor Advised Funds (DAFs) for charitable giving and being purposeful with tax-loss harvesting in taxable brokerage accounts
“Timing these sorts of events can sometimes be difficult to navigate, as they can happen quickly. With most things related to financial and tax planning, the key is being proactive. I help clients reduce state-level liability by using Treasury obligations or municipal bonds (where applicable), which often provide favorable state tax treatment. I also look for ‘gap years,’ windows between retirement and Social Security, to spread out income events. Every dollar we can shift out of a high-tax spike into a lower-income year is a direct win for the client’s bottom line.”
Michael Anderson, CFP of AdviceOnly, agrees with that last, “I help clients in Southern California, where the one-year holding period of stocks doesn’t qualify for a superior long-term capital gains treatment. Instinct is often to liquidate equity compensation in the year of retirement, but if it’s fully vested, I recommend waiting. That way, a retiree can control a high-income spike and liquidate over lower-income years in retirement.”
2. Understand What Your State’s Millionaire Tax Actually Targets
Don’t assume you’re safe from a millionaire tax simply because neither your net worth nor your typical income is in the 7-figure-plus range.
Seven states and the District of Columbia have enacted millionaire taxes, but the specific details vary.
For example:
- Minnesota’s additional tax targets net investment income rather than wages.
- Massachusetts applies a 4% surtax to income above the threshold.
- Washington’s millionaire tax interacts with capital gains differently.
Check what your state’s tax law actually says, and keep in mind that it may say something different next year, since 2 more states are considering implementing such a tax, and more may well follow.
Knowing this can help you structure transactions, pick assets to sell, and time realized gains differently.
3. Plan Ahead for RMDs Before They Become a Tax Problem
If most of your nest egg sits in tax-deferred retirement accounts such as IRAs and 401(k) plans, and you live long enough, RMDs can cause you grief late in life.
To address this, consider:
- Appropriately timed Roth conversions.
- Managed withdrawal timing.
- Optimal division of withdrawals before RMDs between different account types.
These decisions are best made years before RMDs begin, let alone before they become large enough to cause problems.
Another strategy that many propose is moving to a lower-tax, or no-tax, state, one that doesn’t have a millionaire tax.
That’s a major life change that may or may not be appropriate for your specific life situation. In my opinion, most people can solve the problem without such a major life disruption.
The Bottom Line: You Don’t Have to Be a Millionaire to Pay Like One
Whether or not you think millionaire taxes are fair, if your state has one, you need to consider it.
Even if you aren’t wealthy and your typical income is far short of $1 million, current millionaire taxes don’t consider your net worth or your usual income.
They consider your income each year separately, and if it spikes high enough due to one or more one-time events, or even late-life RMDs, you get hit.
Dr. Steven Crane, Founder of Financial Legacy Builders, agrees, “Most people don’t realize you don’t have to be rich to get taxed as if you are. One big year, selling a business, exercising stock, or even a large retirement withdrawal, can push you into a bracket you’ve never been in before. Rather than your lifestyle, it’s about when the income hits. The biggest win I’ve seen is simple in theory but hard in practice: controlling when income shows up. Most people focus on how much they make, but taxes are driven by timing. Spreading income out over multiple years makes the difference between keeping control and unnecessarily handing over a big chunk of change. I tell clients to stop thinking of big financial moves as single events and start thinking of them as sequences. You don’t have to do everything at once. Whether it’s stock options, a business sale, or withdrawals, breaking it up strategically can keep you out of brackets you never needed to be in.”
This is why you need to plan for your peak income years, and for when RMDs may push you into $1-million-plus taxable income.
Yes, you can move to a state that doesn’t have such a tax.
But for most people, it’s enough to pay close attention to properly timing your income and considering the tax implications of financial decisions.
However, that kind of planning is most effective when you do it long before the consequences hit.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the Author
Opher Ganel, Ph.D.
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.
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