Massachusetts Gov. Maura Healey signed into law Bill H. 4104, “An Act to improve the Commonwealth’s competitiveness, affordability, and equity” (the Act), which includes significant changes to the Massachusetts estate tax, the implementation of the “Millionaire’s Tax,” and the reduction of the short-term capital gains tax.
Massachusetts Estate Tax Changes
One of the most significant changes included in the Act is the doubling of the Massachusetts estate tax exemption amount from $1 million to $2 million for decedents dying on or after January 1, 2023. Now, Massachusetts residents or nonresidents owning property in Massachusetts will not be required to pay Massachusetts estate tax unless their taxable estate for Massachusetts purposes is valued at more than $2 million. We note that in certain cases there may still be a need to file a Massachusetts estate tax return even if no tax is due.
As noted above, the Act includes a provision stating the estate tax applies only to taxable estates in excess of $2 million, essentially removing the “cliff effect” that existed under prior law. Previously, if the value of the taxable estate exceeded the filing threshold, the entire estate was subject to Massachusetts estate tax, not just the amount in excess of $1 million. Now, the Act provides that the first $2 million of the Massachusetts taxable estate will escape taxation in its entirety. The tax on the amount over $2 million will be calculated on a graduated scale, with rates beginning at 7.2% and maxing out at 16% for taxable estates in excess of $11 million.
Unlike the federal estate tax exemption, the $2 million Massachusetts estate tax exemption is not indexed for inflation. The exemption will remain at $2 million year after year, unless and until the law is changed. The Massachusetts exemption was last increased in 2006. In contrast, the federal estate tax exemption is adjusted annually for inflation. As a result of the Tax Cuts and Jobs Act of 2017 (the TCJA), the federal estate tax exemption is currently $10 million, indexed for inflation ($12,920,000 in 2023). Note that, unless extended, the provisions of the TCJA concerning the federal estate exemption will sunset effective January 1, 2026, reducing the federal exemption to $5 million, indexed for inflation.
The Act also codifies the position of the Massachusetts Department of Revenue regarding the calculation of estate taxes for Massachusetts residents who die owning real or tangible personal property located in another state. While many lawyers view this position as unconstitutional, unless successfully challenged in court, it may affect the estate tax owed by such Massachusetts residents. If you are a Massachusetts resident with significant real or tangible personal property located outside of Massachusetts, we recommend speaking with your estate planning attorney about how this change may impact your estate.
Elimination of Massachusetts Millionaire’s Tax Loophole
On November 8, 2022, Massachusetts voters voted to amend the state constitution to introduce a 4% surtax on annual income reported on a Massachusetts income tax return in excess of $1 million (the Millionaire’s Tax) beginning in 2023. Massachusetts taxpayers quickly discovered a purported loophole whereby couples filing a joint federal income tax return could file separate Massachusetts income tax returns, allowing each spouse up to $1 million of income before being subject to the Millionaire’s Tax. This strategy effectively doubled the amount of income that could escape the Millionaire’s Tax, from $1 million to $2 million.
The Act, however, now requires married couples who file a joint federal income tax return to also file a joint Massachusetts income tax return, thereby precluding this tax-saving strategy for most taxpayers. This new requirement applies to tax years beginning on or after January 1, 2024, so it may still be possible to file separately for Massachusetts for 2023.
Short-term Capital Gains Tax Rate
The Act also cuts the Massachusetts income tax rate for short-term capital gains, which are gains realized from the sale of capital assets held for a year or less. The short-term capital gains rate will be 8.5%, down from 12%, for tax years beginning on or after January 1, 2023. The long-term capital gains rate remains at 5%.
If you have any questions about how these changes could affect your estate plan, please reach out to your Goodwin Procter estate planning attorney to discuss.