Massachusetts Governor Maura Healey signed An Act to improve the Commonwealth’s Competitiveness, Affordability, and Equity into law on October 4, 2023. The Act makes three key tax changes that you will want to read up on. We explore here.

1. Short-Term Capital Gains

Effective January 1, 2023 (which will impact this coming filing season), short-term capital gains will now be taxed at 8.5% (down from the current 12%). An additional 4% will be added if the Millionaires Tax applies which would bring the total tax rate up to 12.5%.

2. Massachusetts Estate Tax

Also, effective January 1, 2023 (which will impact this coming filing season), the Act doubles the threshold for estates subject to Massachusetts estate tax to $2 million (currently $1 million). Additionally, when the federal taxable estate is $2 million or less, the Massachusetts estate tax will NOT be due. This is a change from the prior regime which subjected the first $1 million of taxable estate to tax once the total taxable estate exceeded $1 million.

3. Millionaires Tax Loophole

What is the Millionaires Tax?

Through a constitutional amendment effective January 1, 2023, known as the Fair Share Amendment, the tax rate on MA residents with income over $1,000,000 will now include an additional 4% surcharge. This tax is applied to each individual taxpayer including trusts and estates with filing requirements in MA. The way the constitutional amendment was written, there was some uncertainty as to whether married couples who use the status “married filing separately” would each get their own $1 million threshold before being subject to the Millionaires Tax. The new tax bill has clarified this issue.

Starting January 1, 2024, individual taxpayers must use the same filing status in MA that they used on their Federal Tax Returns. This eliminates the opportunity for taxpayers to file jointly on their Federal return but separately for MA to minimize their Millionaires Tax exposure. It could still be advantageous to file separately on the Federal return if the additional tax assessed there is less than the MA tax savings. It is important to review any potential benefits lost by filing separately before making the decision to use that filing status.

It is important to note that this filing status requirement is in effect for the 2024 tax year but not for the 2023 tax year. For 2023, taxpayers can still file jointly for Federal purposes but separately for MA purposes. For those married taxpayers who have significant income in each spouse’s name, there could be sizeable tax savings available by filing separately in MA. Filing status should be an important consideration in year-end planning to determine appropriate tax filing status.

This issue also brings up another important consideration with respect to estate planning. In many cases it may be prudent to re-title assets between spouses for good estate planning hygiene. There is unlimited gifting between US citizen spouses available.

Questions? Wondering how you can reduce your tax bill? Contact us.