State Millionaire Taxes: What High Earners Should Know

States are increasingly implementing “millionaire taxes,” presenting new planning challenges for high-income households. Triggered at specific income thresholds such as $1 million, these taxes can significantly impact state tax bills. Beyond headlines, it’s vital to assess how these laws may shape your financial plan and lifestyle.

This article explains how state millionaire taxes work and what high earners should do about them. We’ll share possible strategies and expert advice from financial advisors.

Understanding State Millionaire Taxes

State “millionaire taxes” refer to higher income tax rates that apply to individuals or households earning $1 million or more in annual income. Rather than a separate tax, these policies primarily work as additional brackets within a state’s existing income tax system, meaning only income above the threshold is taxed at the higher rate. For instance, California institutes a 1% surcharge on all income over $1 million.

Several states impose higher tax rates or surcharges on top earners, though the structure and thresholds vary. Here are notable examples:

• California. A 1% surcharge on all income over $1 million to fund state mental health programs.
• Connecticut. Tax rates reach upwards of 6.99% for those with $500,000 or more in combined household income.
• Massachusetts. A 4% surtax on annual income over $1,083,150.
• Minnesota. A 9.85% tax for those with income ranging from $203,151 to $337,931, depending on filing status.
• New Jersey. Increased tax rate for high earners. The exact percentage depends on filing status and income numbers, which taxpayers must calculate via the state’s NJ-1040 Tax Rate Schedules document.
• New York. Increased tax rate for high earners. Determining the precise percentage requires you to use the state’s tax rate schedule.
• Washington. Starting January 1, 2028, a 9.9% tax will apply to Washington taxable income exceeding $1 million.

Because each state defines and applies these taxes differently, those with high earning potential may face very different outcomes depending on where they live and how their income is structured. Understanding these variations is an important first step in evaluating overall tax exposure.

Why State Taxes Matter for High Earners

For high earners, state income taxes can meaningfully impact multiple aspects of a financial plan. They can influence how you manage investments, structure income, or run a business, and even when you choose to realize gains. In some cases, the overall tax burden may also prompt a closer look at where you live and whether relocating makes better financial sense.

One of the most immediate results of “millionaire taxes” is by changing how you plan for and recognize income. That is, instead of accepting earnings as they come, well-paid individuals must be more intentional about the amount they receive and when. This might mean rethinking small nuances in pay, such as bonuses, dividends, or corporate distributions.

“Surpassing earners in surcharge states commonly vary the timing of bonuses, option exercises and corporation distributions in order to remain below the trigger,” Joe Braier, owner at Lake Country Advisors, explains.

Similarly, state income taxes affect your investment strategy or, more specifically, when you choose to sell assets. For example, selling appreciated investments in a high-tax year could result in a significantly larger bill. More broadly, taxes often help shape how portfolios are constructed and managed over time, from asset location to the use of tax-efficient investment vehicles.

Finally, state income taxes may also shift how you think about your lifestyle and living situation as a high earner. In some cases, a larger tax burden can prompt individuals to reconsider where they live, especially if the added costs begin to outweigh the benefits of staying. While relocation may not be a purely financial decision, taxes can become a crucial factor in determining whether a current location still aligns with long-term goals.

While taxes alone may not be a crippling expense, increased rates mean you must be more careful and thoughtful about your finances, specifically income timing and investments. This may be especially true if you’re near the threshold and hope to keep annual income below.

Mistakes to Avoid

Addressing increasing tax rates is vital, particularly for high-earning professionals. However, it’s easy to make mistakes either out of panic or over-optimization that can have an adverse effect on your overall financial situation. Below are four mistakes to watch out for as a high earner living in a state with surcharge tax policies:

1. Waiting Too Long to Plan

One of the most damaging mistakes is simply procrastinating on planning or not doing so at all. When you wait too long, the effect of the tax increase just happens whether you like it or not, and you have little say in what you’ll pay.

“I’ve seen clients accumulate $7, $8, even $10 million in pre-tax retirement accounts with very little in after-tax or Roth savings,” notes Adam Spiegelman, CFP^®,  founder and wealth advisor at Spiegelman Wealth Management. “By the time they’re in their seventies and drawing down, every dollar is taxable and options are limited,” he adds.

Advance preparation, such as investing in tax-free accounts for retirement or managing income effectively, can go a long way in reducing your burden. Reducing your tax burden is much more difficult later on if you haven’t planned for tax efficient drawdowns.

2. Not Diversifying Tax Exposure

Similar to the above, not diversifying your tax exposure via tax-deferred and after-tax accounts can result in you meeting the state threshold and owing more. While there is no one-size-fits-all approach, being mindful about how and where you save and invest for retirement during your earning years can make a huge difference. Once you start drawing assets, being able to take some from after-tax accounts, such as a Roth IRA or Roth 401(k), will be helpful for keeping your income lower than your state’s threshold.

3. Focusing Too Much on Tax Avoidance

While it may sound counterintuitive, obsessing or focusing too much on avoiding taxes can be a mistake. For example, you might sacrifice aspects of your lifestyle (a location you enjoy, withholding income you’d use to treat yourself, etc.) simply for the sake of staying below a state’s income threshold.

We recommend meeting with a financial advisor to discuss a plan to optimize your tax situation. Their expertise and assistance in planning can help you stay calm about the process and avoid sacrificing your lifestyle.

4. Rushing Into Relocation

Finally, leaving your state quickly just to avoid higher taxes is risky. While reducing your tax burden is important, it shouldn’t come at the expense of a lifestyle that aligns with your personal and financial goals. Additionally, relocating for tax purposes can be more complex than it seems.

Braier cautions that “going to a state where there is no income tax on paper, and continuing to live in the old state with most of your economic life” is a mistake. “Surcharge states are aggressive auditors… The standard of establishing a domicile is very high,” he says, noting that properly establishing residency may require meeting strict criteria, such as spending a majority of the year in the new state and changing key aspects of your financial and personal life.

How a Financial Advisor Can Help

If you live in a state that already has or will be imposing a surcharge for higher income, it’s crucial you have a plan in place. While going it alone is possible, you may find it useful to hire a financial advisor to guide you through various tax optimization techniques. This includes diversifying your tax exposure, balancing income needs with your tax burden, and helping you manage a relocation, if needed.

Not only can a financial advisor help you directly, but they can also guide the tax optimization process further by working with other experts. “A good financial advisor serves as the quarterback — bringing together the CPA, attorney, and tax adviser around a cohesive strategy,” says Spiegelman. “That means running scenario analyses, identifying opportunities the client may not be aware of, and asking the right questions,” he adds.

During your search for a high-quality financial advisor, we recommend looking for a fiduciary with notable planning credentials, including but not limited to:

• Certified Financial Planner (CFP)
• Chartered Financial Consultant (ChFC)
• Chartered Financial Analyst (CFA)
• Certified Private Wealth Advisor (CPWA)

These experts should have the requisite expertise to assist you and must always act in your best interest. You can jumpstart your search for such a professional through this free matching tool, which will help you locate someone who suits your needs.

Bottom Line

State-level millionaire taxes can make an already complex financial situation even more so. As a high earner, it’s important to stay calm and approach this challenge with a clear and logical plan. Equally as important, though, is planning proactively (such as optimizing asset location during earning years vs. retirement) to avoid reactionary moves like relocation or withholding income.

“Start with lifestyle, then build your tax strategy around it,” recommends Spiegelman. Regarding staying where you are vs. relocation, you can either begin speaking with a “tax attorney to ensure you meet the legal requirements” or accept the new tax as a “cost of living — the price of access to the place you’ve chosen to build your life,” he says. If it’s the latter, you’ll be able to shift to proactive moves, like hiring professionals and building a plan that works for you.