Important Massachusetts Estate Tax Law Changes You Should Know About
On October 4th, 2023, Governor Maura Healy signed into law Bill H.4104, “An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity”. An important impact of the Fair Share law is the elimination of the “Millionaire’s Tax Loophole” as well as changes to the capital gains tax.
On November 8th, 2022, voters passed a ballot question to amend the state constitution by introducing the Fair Share Amendment, more commonly known as the “Millionaire’s Tax”. Prior to the enactment of the Fair Share Amendment, the Massachusetts Constitution required a single tax rate for all personal income. Massachusetts taxpayers paid a flat 5% tax on all earned income, including salaries, wages, tips, and commissions, and unearned income, including interest, dividends, and capital gains. By utilizing a single tax rate, it became increasingly difficult to raise the state income tax without disproportionately impacting lower-income taxpayers. The Fair Share Amendment’s intent is to address this issue and raise state revenue without impacting lower-income taxpayers.
Effective January 1, 2023, the Fair Share Amendment imposed an additional 4% surtax on all Massachusetts tax filer’s returns reporting income in excess of $1 million, increased annually for inflation. For the 2024 tax year the threshold is $1,053,750. Only the portion of a taxpayer’s taxable income that exceeds the surtax threshold will be subject to the 4% surtax. The surtax applies to individuals, trusts, estates, and unincorporated associations that have taxable income exceeding the surtax threshold in a taxable year beginning with tax year 2023.
Soon after the Fair Share Amendment was enacted, Massachusetts taxpayers discovered a purported loophole under which married couples could legally report less income by electing to file their returns separately with the state, and jointly at the federal level. By filing separately with the state, each spouse could earn up to $1 million of income before being subject to the “Millionaire’s Tax”, thereby effectively doubling the amount of income that could escape the “Millionaire’s Tax” from $1 million to $2 million.
To address this loophole in the new law, starting in the 2024 tax year, the Fair Share Amendment Act now requires married couples to elect the same filing status with Massachusetts and at the federal level. For example, married couples who file a joint federal return must also file a join Massachusetts income tax return. By requiring married couples to use the same filing status at the state and federal levels, the Act effectively eliminates the “Millionaire’s Tax loophole. This requirement does not apply to tax year 2023, but went into effect on January 1, 2024. So it is still possible to file separately for Massachusetts tax year 2023, if you have not yet filed for 2023.
In addition to closing the Millionaire’s Tax loophole, the new law also cuts the Massachusetts income tax rate for short-term capital gains, i.e. gains realized from the sale of capital assets held for a year or less. Before the change, the short-term capital gains rate was 12%. Noth the short-term capital gains rate is 8.5%, effective January 1, 2023. Long term capital gain rate remains at 5%.
Given the significant changes in state tax law and its effect on estates and estate planning, it is more important than ever to get your affairs in order or updated if needed. The Estate Planning Team here at Downey Law Group, LLC, is ready to assist you to either put an estate plan in place that takes full advantage of the benefits of the changes in the new state law. If you would like to make an appointment to speak with one of our Estate Planning & Probate Attorneys, please contact Katie Bramhall in our Topsfield office at 978-887-1000 or kbramhall@dlgclosing.com.
