Massachusetts Passes Tax Bill Impacting Income Tax, Estate Tax and Apportionment

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:

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 years 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.

Revisions to the Pass-Through Entity Tax (“PTET”)

The bill states that the Department of Revenue will analyze the impact of expanding the entity-level PTET to account for the 4% surtax. At present and until guidance is issued, the PTET is withheld at the 5% rate, and any taxpayer subject to the surtax and having PTET withheld should review whether additional payments are required.

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. The tax bill changes that and makes the estate tax only applicable to estates with assets over $2 million and does not tax the portion of the estate under the $2 million. This change is effective January 1, 2023.

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.

Single Sales Factor Apportionment

Massachusetts has long offered single sales factor apportionment while requiring all others to use a weighted three-factor formula that takes into account property and payroll within the Commonwealth. The bill adopts a single sales factor effective January 1, 2025, which likely benefits taxpayers with a large presence here. All taxpayers should consult with their advisors on the impact.

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.