New Legislation: An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity
On October 4, 2023, Governor Maura Healey signed H.4104, “An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity”, which consolidates the separately passed House and Senate tax bills. This significant tax relief package impacts the estate tax, clarifies the new “Millionaires tax,” and reduces the short-term capital gains rate. Some highlights include:
ESTATE TAX
Under current law, the Massachusetts estate tax applies to estates valued at over $1 million and applies to the value of the entire estate. Previously, Massachusetts was tied for the lowest state estate tax threshold in the country, at $1 million per person. The tax bill changes that and makes the estate tax only applicable to estates with assets over $2 million per person and does not tax the portion of the estate under $2 million. This change is effective January 1, 2023. This differs from the federal estate tax, which only taxes assets over the federal exemption (currently $12.92 million per person).
MILLIONAIRES’ TAX AND ABILITY TO FILE MARRIED FILING SEPARATE
Massachusetts voters previously approved a 4% surtax on incomes over $1 million. At the same time, Massachusetts has allowed married couples to file separately even if they do not file that way for federal income tax. This would have presumably benefited married couples each earning up to $1 million. The bill closes what many viewed as a loophole for married couples. Married couples must file joint returns for any year in which a federal joint income tax return is filed starting in the 2024 tax year. For 2023, married couples should discuss how to file with their tax advisors.
For example, a married couple who reside in Massachusetts with a joint taxable income of $1,500,000 with each person earning $750,000. If the married couple files a joint income tax return in Massachusetts, they will pay a 4% tax on $500,000 under the Millionaire’s Tax. Prior to the enactment of the tax bill, this same couple would be permitted to each file a married filing separately income tax return for $750,000 in income and avoid paying approximately $20,000 in Massachusetts income tax since neither of them would be over the $1,000,000 income threshold for the Millionaire’s tax to kick in.
Massachusetts is now forcing this married couple to either pay the 4% income tax on all income over $1,000,000 or forego any federal tax benefits they receive by filing a joint federal return.
SHORT-TERM CAPITAL GAINS TAX RATE
The bill decreases the short-term capital gains rate from 12% to 8.5%, effective for taxable years on or after January 1, 2023. Long-term capital gains tax remains unchanged. The proposal to reduce the short-term rate to 5% did not make it into the compromise bill.
Other Notable Items:
- Increases the tax credit for children, disabled adults, or seniors from $180 to $310 in 2023 and then to $440 in 2024.
- Increases the maximum “senior circuit-breaker credit” from $1,200 to $2,400. This is a refundable credit for senior citizens based on real estate taxes or rent paid on residential property owned or rented as a principal residence.
- Increases the cap on the rental deduction from $3,000 to $4,000.
- Increases the Earned Income Tax Credit from 30 percent to 40 percent of the federal credit.
- Increases the maximum credit for homeowners doing septic tank replacement or repair to $18,000.
For more details on the bill: