What you need to know: On October 4, 2023, Governor Healey signed the “Act to Improve the Commonwealth's Competitiveness, Affordability, and Equity.” The Act provides $1 billion in tax relief to residents and corporations doing business in the Commonwealth. Summaries of the most relevant provisions for our clients follow below. Utilize the glossary list if you wish to skip to particular sections.
KEY ESTATE TAX UPDATES
Massachusetts Estate Tax: For decedents dying on or after January 1, 2023, there is no Massachusetts estate tax for an estate under $2,000,000. The law does not adjust the filing threshold so state tax returns may still be required for all estates at or above $1,000,000, but the new law has increased the amount passing tax-free and has eliminated the “cliff effect.” The “cliff effect” refers to the prior rule, which taxed any estate of $1,000,000 or more on the full value of the estate, not just the amount over $1,000,000. For example, if a Massachusetts resident died December 31, 2022 with an estate of $3,000,000, every dollar would be subject to tax. Beginning January 1, 2023, if a person dies leaving an estate of $3,000,000, the Massachusetts estate tax will apply only to $1,000,000.
For estates of individuals who have died in 2023, if estate tax has already been paid the Massachusetts Department of Revenue (MDOR) has advised that estates should not file amended returns. MDOR has prepared a list of affected taxpayers and will be issuing refunds. There is no published timeline for the refunds. For estates that have not yet filed, MDOR recommends filing and reducing the payment by $99,600. MDOR is working to update the forms, but has not published a timeline.
The Act includes some specific direction regarding how to report out-of-state real property and tangible personal property on a Massachusetts estate tax return. The Act’s reporting method could generate a tax benefit in some cases. In other cases it could lead to Massachusetts property being taxed at slightly higher rates. In cases where the Act’s reporting method causes a higher tax due to the inclusion of out-of-state real property, the Act may be subject to constitutional challenge. We will continue to monitor this issue.
Impact on Estate Planning: Married couples now can protect up to $4,000,000 from Massachusetts estate tax through revocable trust planning, instead of just $1,000,000. For any married couple with more than $2,000,000 of combined assets, an estate plan with revocable trusts is still necessary to gain the maximum benefit from the Massachusetts estate tax exemption. Trusts remain valuable for unmarried taxpayers as well, to avoid probate and to protect privacy.
KEY INCOME TAX UPDATES
Massachusetts Capital Gains Tax: The tax rate for short-term capital gains (sale or exchange of assets held for less than 1 year) is reduced from 12% to 8.5%. Long-term capital gains on the sale or exchange of assets held for one year or longer will still be taxed at a rate of 5%.
Joint Returns: Beginning January 1, 2024, a married couple must file a joint return in Massachusetts for any year in which the married couple filed a joint federal return. Previously if a married couple filed a joint income tax return federally, they could still elect to file separately in Massachusetts. Filing separately was one way for married couples to limit or reduce application of the 4% surtax on income above $1,000,000. The Act removes this planning method, but there is still some limited relief for married couples. If one spouse was a nonresident of Massachusetts during the tax year, either the MDOR will allow separate filings or income will be allocated between the spouses and the taxable income will be adjusted. The requirement to file consistently with the federal return may be subject to constitutional challenge and we will continue to monitor it.
KEY BUSINESS TAX UPDATES
Multistate Tax Calculations: Beginning January 1, 2025, sales will be the sole factor considered to determine Massachusetts taxable income for multistate businesses. This updates Massachusetts tax to correspond more closely to other state tax calculations in our region. From 2025 forward, property and payroll will no longer be part of the Massachusetts tax calculation. The definition of a sale or receipt and where it occurs will follow existing law.
As a general matter, single sales factor apportionment favors companies that have physical capital or employees located in Massachusetts. Conversely, those companies whose activities in Massachusetts are limited to sales could experience a tax increase to the extent such sales are disproportionately focused on Massachusetts customers. Affected taxpayers should evaluate these changes to determine their impact. In addition to the anticipated reduction in taxes for corporations with a relatively large Massachusetts property and payroll base, the change will end the relevance of the manufacturing and mutual fund service corporation classifications for income allocation purposes.
In addition, for Massachusetts financial institutions, the new law changes how financial institutions source receipts from investment and trading activity for sales factor purposes by applying a receipts based fraction.
REAL ESTATE AND DEVELOPMENT TAX UPDATES
Septic Systems: The Act includes updates to the credit for expenditures for the design and construction for the repair or replacement of a failed cesspool or septic system. The credit has been increased to 60% of the federal credit (previously 40%). Taxpayer expenditures up to $30,000 can qualify (previously limited to $15,000). The credit will be allowed beginning in the tax year when the repair or replacement of the system is completed. The credit allowed in a single tax year has increased from $1,500 to $4,000, and any excess credit can be carried forward five subsequent tax years, up to an aggregate maximum of $18,000 (60% of the $30,000 maximum for expenditures). Massachusetts’ credit now requires compliance with the State Environmental Code in addition to any federal requirements.
Lead Paint: The maximum credits for lead paint abatement in residential real property built prior to 1978 have increased. The maximum credit for full compliance with deleading increased from $1,500 to $3,000 per dwelling unit. This credit is available for removal or containment of paint, plaster, or other accessible structural materials containing dangerous levels of lead, and for replacement of one or more windows. Taxpayers receive a credit for the cost of deleading or $3,000, whichever is less, and must have a letter or full deleading compliance. A lower credit is available for partial abatement of lead. This credit has increased from $500 to $1,000 per dwelling unit, and is available when a taxpayer receives a letter of interim control. Loan programs for affordable housing developers and other local incentives may apply in addition to the state tax credit.
Rental Property Tax Exemptions: Any city and town in Massachusetts now may establish a property tax exemption for certain residential rental real property. To qualify, the exemption can apply only to residential property. The property must be rented yearly (not month-to-month) and occupied year round by individuals whose income does not exceed a certain amount. Each city and town can set its own income limit, up to 200% of its median income. The property tax exemption amount also is determined by the city or town. However, the exemption can’t be any higher than the proportion of square footage of housing in that town occupied by people within the set income limit. For example, let’s say the median income of Anytown is $60,000 and the town has 1 million square feet of housing. Persons with incomes of $120,000 or less occupy 300,000 of the town’s square feet of housing. Anytown can give up to a 30% property tax exemption for properties rented on an annual basis to persons with income up to $120,000.
Low-Income Housing Credit: The Act increases the maximum cumulative low-income housing tax credits that may be authorized each year under M.G.L. ch. 62 § 6(q) and ch. 63, § 38BB and delegates that authority to The Executive Office of Housing and Livable Communities (EOHLC). In 2023, EOHLC may authorize $57,000,000. From 2024 forward, EOHLC may authorize up to $30,000,000 annually for all low-income housing credits issued statewide, inclusive of any amounts carried forward from prior years. Unused credits under these sections will no longer carry forward. Additionally, beginning January 1, 2023, The Department of Housing and Community Development’s authorization to grant low-income housing tax credits under M.G.L. ch. 62 § 6i(b)(1) and ch. 63 § 31H has been increased from $40,000,000 to $60,000,000, plus certain other amounts.
OTHER TAX UPDATES FOR INDIVIDUALS
Child Tax Credit: The child tax credit has increased from $240 per dependent (maximum $480) to $310 per dependent in 2023, and $440 per dependent in 2024 and future years. There is no longer any maximum credit. If the credit exceeds the taxpayer’s tax liability, the excess is treated as an overpayment and is paid without interest.
Commuting Expense Deductions: Commuting expenses that qualify for a deduction have been expanded. They now include any MBTA fare (not just weekly or monthly passes) and expenses for manual and electric bicycles including purchase, bikeshare memberships, bicycle improvements, repair, and storage. The deduction applies to total commuting expenses in excess of $150, and shall not exceed $750.
Rent Deduction: The maximum rent deduction allowed for a taxpayer filing as single, head of household, or married filing jointly has increased from $3,000 to $4,000. This deduction is available for Massachusetts residents who pay rent for their principal place of residence.
Student Loan Payments by Employers: An employer’s student loan assistance to its employees will be excluded from the employees’ Massachusetts taxable income. Student loan assistance includes payments of principal or interest on a qualified education loan as defined for federal tax purposes. The full amount of the student loan assistance shall be excluded from Massachusetts taxable income. However, for federal income tax purposes, only the first $5,250 of payments made by an employer each year will be excluded from taxable income.
Elder Property Tax Relief: Cities and towns may give property tax relief to residents over age sixty who provide volunteer services to the local government. The maximum amount of property tax relief has increased from $1,500 annually to $2,000.
Income-Restricted Tax Relief: The Act includes several areas of relief for lower income taxpayers, including:
- Earned Income Credit: A taxpayer is allowed a credit against Massachusetts income taxes if that person qualified for and claimed the federal earned income credit. The earned income credit limit in Massachusetts has been increased to 40% of the federal credit rather than 30%.
- Elder “Circuit Breaker” Credit: An owner or tenant of a residential property who is over age 65 and not a dependent may claim a credit equal to the amount by which the real estate tax payment (or the portion of rent constituting the real estate tax payment) on the taxpayer’s principal residence exceeds 10% of the taxpayer’s total income. The maximum credit has been increased from $1,200 to $1,500.
OTHER TAX UPDATES FOR BUSINESSES
Dairy Farmers: Massachusetts increased the maximum cumulative dairy farmer tax credits that can be issued to individual farmers and corporations each year. The total has increased from $6,000,000 to $8,000,000 for all dairy farmer tax credits issued statewide.
Wineries: An excise tax must be paid on sales within the Commonwealth of alcoholic beverages. Still wine, vermouth, and cider with low alcohol content qualify for lower excise tax rates. The Act adjusts the definitions of these beverage categories to be more than 3% but no more than 8.5% alcohol by volume. Previously the definition referred to a maximum of 6% alcohol by weight.
Apprentice Tax Credits: The power to expand available categories for apprentice tax credits has been delegated to the secretary of labor and workforce development. To add a new category of employer, the secretary must identify it as “critical to a regional labor market economy.”
Manufacturing Corporations: In Massachusetts, manufacturing corporations are subject to specific tax rules but the term “manufacturing corporation” was not previously defined in the state tax code. The Act defines a manufacturing corporation as any corporation that meets one of the following five tests:
- 25% or more of its gross receipts are derived from the sale of goods that it manufactures;
- 25% or more of its payroll is paid to employees working in its manufacturing operations and 15% or more of its gross receipts are derived from the sale of goods that it manufactures;
- 25% or more of its tangible property is used in its manufacturing operations and 15% or more of its gross receipts are derived from the sale of goods that it manufactures;
- 35% or more of its tangible property is used in its manufacturing operations; or
- The corporation’s manufacturing activities are deemed substantial under relevant regulations promulgated by the Commissioner of Revenue.
ADMINISTRATION
Future Payments of Excess State Funds: The law requiring Massachusetts to refund surplus state funds has been amended. Going forward, refunds will not be required unless the total surplus exceeds 25.5% of the state budget (increased from 15%). Additionally, refunds to individual taxpayers shall be equal in value, rather than proportionate to their tax payments in a particular prior year. To prevent future surpluses, the Commissioner of Revenue must submit monthly reports on the net state tax revenue for the fiscal year to multiple legislative committees.
Feasibility Studies: The Act provides for a feasibility study of an elective entity-level tax of up to 4% on the taxable income of eligible pass-through entities, with a corresponding refundable credit. The Act also provides for a feasibility study of advance quarterly payments of tax credits.
Effective Date: Unless otherwise noted, all provisions of the Act are effective January 1, 2023.
