Estate and Income Tax Provisions in Pending Massachusetts Tax Relief Package

Nutter McClennen & Fish LLP

The Massachusetts House and Senate voted in favor of a Massachusetts tax relief bill. The legislation is now on Governor Maura Healey’s desk, and she has until October 8th to act. More than two decades have passed since the last significant Massachusetts tax cut, where voters approved a measure to reduce the Commonwealth’s income tax to 5 percent. The total Fiscal Year 2024 cost of the new legislation is estimated at about $571 million. We highlight below the most significant provisions of the legislation.

Estate Tax

One of the major provisions presented in the bill will have a significant effect on estate planning. For Massachusetts residents (and non-residents owning property in Massachusetts) who die on or after January 1st of this year, the Massachusetts estate tax exemption is increased from $1 million to $2 million. The legislation also creates a “true” exemption as it provides for a $99,600 credit against the tax. This means that the first $2 million of value in every estate will be exempt from estate tax, regardless of the total value of the entire estate.

Short-Term Capital Gains Tax

Another significant provision is the reduction in the rate at which short-term capital gains are taxed. The legislation reduces the short-term capital gains rate, which applies to gains from the sale or exchange of assets held for a year or less, from 12 percent to 8.5 percent, effective for the 2023 tax year. Advocates for reducing the rate supported a reduction to 5 percent, which is the current long-term capital gains rate, but a compromise 8.5 percent rate was included.

Single Sales Factor Apportionment

Corporations doing business in the Commonwealth will be affected also by this bill due to the change to a single sales factor apportionment. Currently, with some exceptions for certain industries, the Massachusetts corporate tax is calculated using a company’s local payroll, property holdings, and in-state sales. The bill would replace these factors with a simplified version that uses only a company’s sales within the Commonwealth. This overhaul in how Massachusetts will calculate taxes owed by multistate companies, effective for tax years beginning in 2025, will put Massachusetts in line with 39 other states and is aimed at making Massachusetts more competitive with other states.  

Provisions Affecting the Millionaire Tax Implementation

A series of tax policy proposals were included in the bill as well. One to keep an eye on for tax planning purposes, especially with the so-called Millionaire’s Tax that took effect on January 1, 2023, relates to married couple tax filings. This policy change would be effective for tax years beginning on or after January 1, 2024, and would require married couples to align their state filing status with that of their federal filing status. The Millionaire’s Tax provides for a surtax of 4 percent on an individual’s annual taxable income to the extent that it exceeds $1 million, and this policy is intended to expand the scope of the surtax by taxing more couples whose combined income exceeds $1 million, even when the individual income of one or both falls short of the threshold.

Other Changes for Commonwealth Taxpayers

Numerous other provisions in the bill provide for tax credits and incentives to support policy priorities such as housing and childcare. These provisions will affect areas such as housing development, low-income housing, rent reduction, earned income, and child and dependent care.

What’s Next?

These changes, which are expected to be enacted, could affect your existing estate and income tax planning.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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