By Jeffrey T. Rogers, CPA, MST
On October 4, 2023, Massachusetts Governor Maura Healy signed a bill into law that is estimated to provide up to $1 billion in annual tax relief to taxpayers in the Commonwealth. Families, businesses, seniors, and renters are all expected to experience some form of savings. Some of the provisions are retroactive to the beginning of 2023 and others do not fully go into effect until 2027.
While changes were made to a vast array of areas within the tax code, this article will focus on those changes that we feel will most impact our clients and friends, beginning with the three that will likely provide the largest benefit.
The Change: Increase to Estate Tax Threshold from $1 million to $2 million
In general terms, the estate tax is a levy imposed on the value of the net assets held by a decedent at the time of his or her passing. For several years, much has been made about how only the wealthiest of taxpayers were subject to the estate tax. While true at the federal level, assets held by Massachusetts residents have often been subject to the state’s estate tax prior to transfer to their beneficiaries. That is because, while the federal government allows each decedent a credit against the estate value in an amount just shy of $13 million, Massachusetts has only allowed $1 million to be excluded. Further, the law has been written in a manner that results in a cliff effect. Historically, any estate with a value greater than $1 million has been subject to the MA estate tax and not just on the excess, but on the full value of the estate.
With the passing of the bill, the estate tax exclusion doubles from $1 million to $2 million and the cliff language has been removed such that a $3 million estate, for example, would only be subject to tax on $1 million of assets.
The Change: Multi-State Businesses to “Apportion” Income Using Single Sales Factor
Businesses transacting in multiple states are required to use a methodology called apportionment to allocate their income amongst the states in which they do business. Historically, Massachusetts, and several other states, have employed a three-factor approach to apportioning income. The three factors are sales, payroll, and property (including rent payments). For each factor, a business would compute the percentage of Massachusetts activity to total activity. All three factors would be tallied and averaged after double-weighting the sales.
With the passing of the bill, Massachusetts will no longer take payroll and property into account. Massachusetts apportioned income will be determined on the basis of MA sales to total sales. The change will benefit Massachusetts-based businesses with limited out of state payroll but significant out of state sales. As an example, a business whose payroll and property were 100% MA but with only 60% in-state sales, would have previously been taxed on 80% of their income ((100%+100%+60%+60%)/4). Now they will be taxed on 60% of it. With net income of $1 million and a C-Corp tax rate of 8%, that’s a $16,000 annual savings.
Out-of-state businesses with sales in MA but not much else, will see the tax that they pay to the Commonwealth increase as a result of this change. This is similar to the same manner that Massachusetts’ businesses have been taxed when doing business in some of the surrounding states. This change to the law was clearly made to provide some competitive advantage to Massachusetts-based businesses and to give them incentive to remain in the Commonwealth.
The Change: Reduction to Short-term Capital Gain Rate from 12% to 8.5%
The Federal and Massachusetts government have long tried to encourage long-term investment (greater than 1 year holding period) by discouraging short-term investment. While the federal government provides a lower tax rate on long-term gains, Massachusetts takes the opposite approach and imposes a higher, 12% rate on short-term gains. The House had hopes of reducing the rate to the 5% that applies to long-term gains while the Senate had no desire to change it. Instead, they compromised with the 3.5% tax rate reduction to 8.5%.
Not all the changes were perceived to be positive developments.
Change: Federal Married Filing Joint Filers must use the same filing status in MA beginning in 2024
Last November, Massachusetts voters approved a new 4% surtax, effective 1/1/2023 on personal income in excess of $1 million (the so-called “Millionaire’s Tax”) on each income tax return filed. Many advisors believed that married taxpayers could partially mitigate the impact of this surtax by filing individually in the state, even if filing jointly with the federal government. With the passing of this bill, beginning in 2024, Taxpayers will be required to use the same filing status for both federal and state purposes, thereby eliminating the possibility of reducing the tax by filing separate returns.
Change: Approach to Disbursing Excess Tax Funds Collected to MA Taxpayers
Last year the state was in the unique position of having to issue refunds to taxpayers due to the existence of an obscure law within section 62F that required the return of excess tax revenue collected. In 2022, refunds were issued in proportion to the tax revenue that had been paid in. While the provision in section 62F has not been eliminated, the manner of disbursement has been modified such that each taxpayer in the Commonwealth would receive equal payments. Obviously, this is either a positive development or a negative one based on where the taxpayer’s tax liability falls within the state average.
As previously mentioned, there were a host of other taxpayer-friendly changes to areas such as the Child and Family Tax Credit, the Earned Income Tax Credit, the Renter’s Deduction, Low-Income Housing Tax Credit, Title V Septic Tax Credit, Lead Paint Abatement Credit, and the Apprenticeship Credit, just to name a few.
As we head into year-end planning season, this bill potentially adds a few more items to add to the agenda. If you haven’t already, we highly encourage you to schedule an appointment with your EJC contact before the end of the year. We would be happy to discuss anything contained in this summary or other tax planning related questions.
About the Author:
Jeffrey T. Rogers, CPA, MST
Jeff has over 16 years of experience specializing in tax planning, tax research & compliance, IRS & State Exam Representation, Mergers & Acquisitions, and Business succession & ownership transitions with a focus in the construction, real estate, non-profit, restaurant, manufacturing & distribution industries. He helps businesses adopt the most tax efficient accounting methods available to them and identifies all tax credit and incentives to which they may be entitled. In recent years, Jeff has developed a deep understanding of the Employee Retention Credit program and has presented on the topic for multiple trade associations, Chambers of Commerce, and at other business events. He was published in the Boston Business Journal and the Cape and Plymouth Times on the subject matter.
Prior to joining E.J. Callahan & Associates, Jeff has served as both a Partner and Director at regional and national CPA firms. He holds a Bachelor of Science Degree in Accounting from Merrimack College and a Master of Science degree in Taxation from Bentley University. Jeff is an active member of the American Institute of Certified Public Accountants (AICPA), the Massachusetts Society of Certified Public Accountants (MSCPA), and the CFMA. Jeff is also on the MSCPA Taxation Committee, a Board Member for the Danvers American Little League and a volunteer coach in several youth sports programs.
Check out Jeff's work:
Boston Business Journal - July 1, 2021
Cape & Plymouth Business Media - December 2021 Issue, pg. 19
"Connecticut Sales Tax for Construction Contractors" Webcast
"Accounting Methods for Contractors" Webcast
"Tax Implications of Distributions from S-Corporations" Webcast
"Massachusetts Sales & Use Tax for the Construction Industry" Webcast
"Tax Planning & Incentives for Contractors" Webcast