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On Oct. 4, 2023, Massachusetts passed a wide-ranging $1 billion tax reform package, Bill H. 4104: An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity, which impacts several Massachusetts tax laws, including the Massachusetts estate tax, the short-term capital gains tax, the Massachusetts Millionaires Tax and the rental deduction. Here are the law’s key provisions and impact.
Purpose of the New Law
This tax relief package is intended to make Massachusetts a more attractive and affordable place to live and operate a business and to make the Commonwealth more economically competitive with other states.
Key Provisions
The new law’s key provisions include:
Massachusetts estate tax: Massachusetts has now doubled its estate tax exemption from $1 million to $2 million by providing a $99,600 credit against the Massachusetts estate tax. This change allows decedents to pass up to $2 million of assets to non-spousal and non-charitable recipients free of Massachusetts estate taxes. Moreover, this change is effective retroactively and available for estates of individuals who died on or after Jan. 1, 2023. Unlike the federal estate tax exemption amount, a decedent’s Massachusetts estate tax exemption isn’t “portable” between spouses.
The new law also addresses other historic estate tax issues. It eliminates the notorious “cliff” effect by providing that only assets in excess of $2 million, rather than the decedent’s entire taxable estate, would be subject to the Massachusetts estate tax.
Additionally, it clarifies the calculation of the tax with regard to real and tangible personal property physically located outside of the state. Finally, no taxes would be payable as long as the decedent’s federal taxable estate is no more than $2 million.
Even with this reform, Massachusetts remains one of only 13 states with an estate tax and moves from the lowest exemption amount to the third lowest threshold for the imposition of an estate tax. It’s notable that the new exemption amount won’t be indexed for inflation.
In light of this change to the estate tax, personal representatives or their advisors who are administering the estates of 2023 decedents should review or prepare their Massachusetts estate tax return filings with the increased $2 million exemption in mind. Lifetime gifting, when part of an overall wealth transfer plan, has become more attractive for Massachusetts residents who pass with assets above the $2 million threshold in their federal estate.
If your client is a married couple, review asset ownership to determine if each spouse has $2 million that wouldn’t be subject to the marital deduction. Use this amount to take full advantage of the new $2 million exemption amount at the first death. Previously, this amount was only $1 million.
Many estate plans are structured to fund a “family” or “credit shelter” trust with an amount that can pass free of federal and state estate taxes. Accordingly, review existing estate plans to make sure that any trust of this nature has the correct terms given to reflect the increased Massachusetts exemption amount.
When reviewing a plan, remember that absent future Congressional action, the federal estate and gift tax applicable exclusion is scheduled to sunset to pre-2018 levels on Dec. 31, 2025. The federal exclusion after that date is projected to be in the $6.8 million range per person after statutory inflation adjustments. The 2023 federal exemption amount is currently $12.92 million per person and $25.84 million per married couple and is subject to indexing for inflation.
Short-term capital gains tax: Beginning in 2023, the Massachusetts short-term capital gains rate will be reduced from 12% to 8.5%. Long-term capital gains rates remain at 5%. The capital gains rate on collectibles, such as gold, remains at 12%.
Massachusetts millionaires tax (MMT): The MMT, which was approved by Massachusetts voters in 2022 and became effective on Jan. 1, 2023, imposes a 4% surtax on Massachusetts taxpayers with annual taxable income over $1 million. The new legislation mandates that beginning in 2024, married couples are required to file their Massachusetts income tax return using the same filing status as they do for their federal return. This closes the planning opportunity for married taxpayers to use married filing separately (MFS) status for their Massachusetts income tax returns, thereby avoiding the MMT on up to $2 million for a couple, while using married filing jointly (MFJ) for federal purposes, which is typically more income tax advantageous. Because this aspect of the tax reform won’t take effect until 2024, married couples with taxable income in 2023 over $1 million should explore the impact of MFS for Massachusetts purposes, even if they’re MFJ for federal purposes.
Rental deduction: The rental deduction increases from $3,000 per year to $4,000 per year beginning in 2023.
Child tax credit: The reform increases the tax credit available for taxpayers with children under age 13, senior citizens and disabled adults, from $180 in 2022 to $310 in 2023 and $440 in 2024.
Business taxation: For companies conducting business in multiple states, the taxation of multi-state business income will now focus solely on the percentage of sales sourced in Massachusetts, rather than also factoring in payroll and capital asset location, when creating a tax nexus. This legislation also directs the Department of Revenue to explore combining an entity level tax with a tax credit to help mitigate the impact of the MMT on individual taxpayers with pass-through business entities.
Tax credit refund: Going forward, if the Commonwealth’s overall tax revenue exceeds the allowable limits and it’s determined that amounts must be returned to individual taxpayers, such amounts will be returned to taxpayers equally (per capita) based on the number of tax returns filed, and not pro-rata based on each taxpayer’s tax liability, as has been the case previously. This credit will be refundable even if it exceeds the actual total tax liability of a particular taxpayer. MFJ will count as two taxpayers for this calculation.
Jody R. King is director of wealth planning, and Aimee Fukuchi Bryant is vice president and trust counsel, both at Fiduciary Trust Co. in Boston
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