Important Provisions of the Massachusetts Tax Relief Bill

October 04, 2023

On October 4, 2023, Governor Healey signed into law the Massachusetts tax relief bill (“[a]n Act to improve the Commonwealth’s competitiveness, affordability, and equity”). The bill contains many tax relief provisions, including changes to the state estate tax and changes to the short-term capital gains tax. The bill also adds a provision that may impact married couples who file their federal income tax returns jointly.

Relevant Changes:

Estate Tax:

  • Previously, Massachusetts was tied for the lowest state estate tax threshold in the country, at $1 million per person. The tax was also more aggressive than other states’ due to the so-called “cliff effect”, whereby estates valued at over $1 million were subject to tax on the entire value of the estate. This differs from the federal estate tax, which only taxes assets over the federal exemption (currently $12.92 million per person).
  • Under the Massachusetts tax relief bill, the estate tax threshold is increased to $2 million per person for estates of decedents dying on or after January 1, 2023. In addition, the bill grants a state estate tax credit, which relieves the “cliff-effect” discussed above. The estate tax marginal rates will remain the same.
  • The bill also changes how the tax on out-of-state real estate and tangible personal property is calculated. To address a constitutional issue with the prior tax, the new bill provides a proportional reduction when a decedent owned out-of-state real estate or tangible personal property. Likewise, the bill is more generous than prior law to out-of-staters who own Massachusetts real estate or tangible personal property.

Short-Term Capital Gains Tax:

  • Previously, Massachusetts taxed any gain from the sale or exchange of capital assets held for 1 year or less (i.e., short-term capital gains) at a rate of 12%.
  • The Massachusetts tax relief bill reduces the short-term capital gains tax to 8.5%, retroactive to January 1, 2023.

Married Couples Filing Jointly for Federal Tax Returns:

  • As you may know, Massachusetts voters approved the adoption of an amendment to the Massachusetts Constitution to establish an additional 4% state income tax (“surtax”) on the portion of the taxpayer’s annual income that exceeds $1 million. The surtax is imposed on income earned beginning January 1, 2023.
  • The Massachusetts tax relief bill contains a provision that requires married couples to file a joint income tax return in Massachusetts for any year in which they file a joint federal income tax return, beginning with income earned on or after January 1, 2024.
  • This provision is aimed at removing a possible loophole, by which married couples in Massachusetts seek to avoid the 4% surtax by filing separate, rather than joint, Massachusetts income tax returns.

Additional Resources

2023 Personal Tax Planning Update
The new year brings with it new tax-savings opportunities, including opportunities for tax-free gifts and extra time for tax-free growth of assets in retirement accounts.
Important Retirement Account Changes Under the SECURE 2.0 Act of 2022
On December 29, 2022, the SECURE Act of 2022 (SECURE 2.0) was signed into law as part of the Consolidated Appropriations Act 2023. SECURE 2.0 seeks to encourage savings for retirement.
Expanded Opportunities for Charitable Giving with Retirement Assets
Retirement plan assets (other than Roth IRAs) are among the most “tax heavy” assets people own because distributions from retirement plans are fully taxed at ordinary income rates. Estate planners commonly advise their clients to fulfill charitable gifts with retirement plan assets, as that can reduce both estate taxes and income taxes that heirs would otherwise have to bear.