We republish this briefing note from Fiduciary Trust Company about developments affecting tax in Massachusetts.

The following article was issued by Fiduciary Trust Company about moves earlier in October by the state government of Massachusetts. The firm has granted this news service permission to republish it. (It has also appeared on the website of the firm.) The writers are Jody R King, director of wealth planning, and Aimee Fukuchi Bryant, vice president and trust counsel.

As readers know, this news service has already delved into the tax and trust policies of California. Family Wealth Report is keen to review policies of other states where they are noteworthy. This news service is grateful to share these views; the usual editorial disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

On October 4, 2023, Governor Maura Healey signed a $1 billion tax reform package. This insight explores the key provisions as well as its impact.

Massachusetts tax update
Massachusetts has enacted a wide-ranging $1 billion tax reform package. On October 4, 2023, Governor Maura Healey signed Bill H.4104: An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity into law, which impacts several Massachusetts tax laws, including the Massachusetts estate tax, the short-term capital gains tax, the Massachusetts Millionaires Tax, the rental deduction, and more.

Why was this enacted?
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.

How will this impact me?
In short, here is how it may impact you:

Decedents can now pass up to $2 million of assets to non-spousal and non-charitable recipients without triggering additional Massachusetts estate taxes.

The Massachusetts short-term capital gains rate will be reduced from 12 per cent to 8.5 per cent. Long-term capital gains rates remain at 5 per cent. Beginning in 2024, married taxpayers will no longer be able to reduce income subject to the Massachusetts Millionaires Tax by using different Massachusetts and federal filing statuses.

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.

What are the key provisions? 
Details of the key provisions of the reform are highlighted below.

1. 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 January 1, 2023.

The reform 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 thirteen 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 is notable that the new exemption amount will not be indexed for inflation.

Planning note: Personal representatives or their professional advisors who are administering estates of 2023 decedents should review or prepare their Massachusetts estate tax return filings with the increased $2 million exemption in mind.

Planning note: 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.

Planning note: Unlike the federal estate tax exemption amount, a decedent’s Massachusetts estate tax exemption is not “portable” between spouses.

For married couples, asset ownership should be reviewed to determine if each spouse has $2 million that would not be subject to the marital deduction, which can be used to take full advantage of the new $2 million exemption amount at the first death. Previously, this amount was only $1 million.

Planning note: 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, existing estate plans should be reviewed 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, one should also remember that absent future Congressional action, the federal estate and gift tax applicable exclusion is scheduled to sunset to pre-2018 levels on December 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.

2. Short-term Capital Gains Tax: Beginning in 2023, the Massachusetts short-term capital gains rate will be reduced from 12 per cent to 8.5 per cent. Long-term capital gains rates remain at 5 per cent. The capital gains rate on collectibles, such as gold, remains at 12 per cent.

3. Massachusetts Millionaires Tax (MMT): Under the new legislation mandates that begin 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.

As a reminder, the MMT, which was approved by Massachusetts voters in 2022 and became effective on January 1, 2023, imposes a 4 per cent surtax on Massachusetts taxpayers with annual taxable income over $1 million.

Planning note: Because this aspect of the tax reform will not 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 are MFJ for federal purposes.

4. Rental Deduction: The rental deduction increases from $3,000 per year to $4,000 per year beginning in 2023.

5. 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.

6. 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.

7. Tax Credit Refund: Going forward, in the case where the Commonwealth’s overall tax revenue exceeds the allowable limits and it is 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.

This legislation represents a significant change to existing Massachusetts tax laws. The updates to the Massachusetts estate tax have been long-awaited, but some of the other provisions are also notable as an effort to attract families and businesses to the Commonwealth. 

(Note: Fiduciary Trust Company should not be conflated with Fiduciary Trust International, which is a separate business.)