Massachusetts Recent Tax Updates Affecting Individual Filers

By November 20, 2023 Uncategorized

Massachusetts Millionaires’ Tax

In November of 2022 Massachusetts voters approved referendum Question 1 to amend the Massachusetts Constitution to impose an additional 4% surcharge on individual income tax returns that have over $1 million of Massachusetts taxable income. This 4% surcharge dubbed the “Millionaires’ Tax” will go in effect for tax years beginning after January 1, 2023. The 4% surcharge will be charged on every dollar of taxable income over $1 million in addition to Massachusetts 5% tax rate. The 9% effective tax rate on income over $1 million will be one of the highest state income tax rates in the country. Filers who have Massachusetts sourced income of over $1 million will be subject to the 4% surcharge regardless of state residency status.

Married Filing Joint Conformity

Many tax practitioners speculated they could file Married Filing Separate tax returns to help reduce their client’s overall exposure to the Millionaires’ Tax by separating the taxable income of two spouses and reporting them on separate tax returns. In some situations, this could have brought one or both taxpayers below the $1 million threshold, successfully mitigating the Millionaires’ Tax. However, on October 4, 2023, Gov. Maura Healey signed House Bill 4104 that included many tax provisions. Included in HB4104 is the requirement of Massachusetts married couples who file a federal joint tax return to also file a Massachusetts joint tax return, effectively ending the attempt by practitioners to implement this piece of tax planning. The Married Filing Joint conformity provision takes effect January 1, 2024, allowing taxpayers with the opportunity to utilize this tax planning tool in 2023 to lower their state income tax.

Reduction in Tax Rate of Short-Term Capital Gains

Also included in HB4104 is a provision that reduces the Massachusetts tax on short term capital gains (capital assets sold that were held for less than 1 year) to 8.5% effective January 1, 2023. Prior to 2023 Massachusetts imposed a 12% tax rate on short term capital gains.

Massachusetts Charitable Contribution Deduction Returns

Earlier in 2023 Massachusetts legislature brought back the provision to allow Massachusetts taxpayers to deduct contributions to a qualifying charity from their taxable income regardless of whether they itemized their deductions or utilized the standard deduction on their federal tax returns. The addition of the charitable contribution deduction could also prove to be a valuable tax planning tool for taxpayers trying to reduce the new Millionaires’ Tax discussed above. This law was previously in effect from 2000-2002 but was suspended to help improve the Commonwealth’s budget.

Other Individual and Estate Tax Relief Measures Included in HB4104

  • Estates of decedents passing on or after Jan. 1, 2023 will be allowed a credit of up to $99,600 against the estate tax, effectively eliminating estate tax for estates under $2 million
  • A new tax credit for dependents of $310 for 2023 and $440 for 2023.
  • Increase to the earned income tax credit to 40% of the federal credit
  • Increase the maximum on the rental deduction to $4,000
  • Increases the septic system tax credit to a maximum of $18,000

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