Tax Planning Strategies

As we approach year end, December is a fitting time to consider some tax planning strategies that may help reduce your upcoming tax bill and achieve your long term financial goals. Given the complexity and ever changing tax laws, it is important to be up-to-date on the most recent changes. On October 4, 2023, the governor of Massachusetts signed an extensive tax package into law. Most of these changes are effective retroactive to January 1, 2023. Below are some important highlights for Massachusetts taxpayers as well as non-residents that own property in Massachusetts to consider:

Massachusetts Estate Tax
The estate tax exemption for a Massachusetts estate increases from $1 million to $2 million by providing a uniform tax credit of $99,600 against the Massachusetts estate tax. The reform also effectively eliminates a so-called “cliff effect” since only assets in excess of the $2 million threshold will now be subject to the estate tax. Formerly once a decedent’s taxable estate exceeded the $1 million filing threshold, the entire estate was subject to Massachusetts estate tax. Unlike the federal exemption, the Massachusetts estate tax exemption will not be indexed for inflation. Moreover, it is still not “portable” between spouses, as the federal exemption currently is. In other words, if there is any unused exemption left by the first spouse to die, the remaining amount cannot be carried over to the surviving spouse. For married couples, proper planning is still required to maximize the use of the exclusion for each spouse.

Under the Act, if a resident dies owning real estate or tangible personal property outside of the Commonwealth, any estate tax owed will be reduced proportionately by the value of such property. For example, if the estate tax due on a Massachusetts resident’s taxable estate (including a Florida property) is $200,000 and the Florida property makes up 10% of the gross estate, the estate tax due will be reduced by 10% to $180,000.

On the other hand, non-residents owning real estate or tangible personal property within the Commonwealth will still pay tax to the Commonwealth in an amount proportionate to the value of such property if the non-resident has a Massachusetts taxable estate exceeding $2 million. For non-residents, the Massachusetts taxable estate includes all property, wherever it is located. For example, if the estate tax due on a Florida resident’s taxable estate (including a Cape Cod property) is $200,000 and the Cape Cod property makes up 10% of the gross estate, then the Massachusetts estate tax will be 10% of the overall estate tax or $20,000.

Short-Term Capital Gain
The Act reduces the tax rate on sale of capital assets held for a year or less from 12% to 8.5%.

Earned Income Tax Credit
The related income tax credit increases from 30% to 40% of the federal tax credit. The Earned Income Tax Credit is a federal tax credit.

Homeowners and Renters
The circuit breaker tax credit, a refundable credit for eligible homeowners who are 65 years or older, doubles from $1,200 to up to $2,400. The income limit is still applicable for this tax credit. The Act increases the maximum amount that can be deducted for rent from $3,000 to $4,000.

Child and Dependent Tax Credit
The refundable tax credit increases from $180 to $310 for 2023, then to $440 starting in tax year 2024 and onward. The new credit also removes the cap on eligible dependents that penalized large families.

Chapter 62F Tax Refund
Under Chapter 62F of the Massachusetts General Laws, if tax revenue collected exceeds the annual revenue cap, the surplus must be credited back to the taxpayers. Previously, this refund was calculated based on a percentage of a taxpayer’s income tax liability for that year. Going forward the credit will be returned to taxpayers equally (per capita) based on the number of tax returns filed. Spouses who file a joint tax return (MFJ) will count as two taxpayers for this calculation.

Millionaire Tax - 4% Surtax
The new tax package also closes a loophole to the Millionaire’s tax where married taxpayers who file joint returns for federal tax purposes are also required to file jointly for Massachusetts income tax purposes. This prevents a married couple from filing separately for Massachusetts income tax purposes and spreading their income between them for the millionaires’ surtax. However, this mandate is not effective until 2024, so there are still tax planning opportunities for married couples who expect to have taxable income over the $1 million threshold this year.

The Massachusetts Department of Revenue recently released a Frequently Asked Questions webpage addressing questions that taxpayers may have related to the Millionaire tax which includes calculation of the tax and income that is subject to this surtax. Below are some of the key items to note:

  • A Massachusetts taxpayer’s taxable income for purposes of the Millionaire tax is the sum of a taxpayer’s Parts A, B, and C taxable income. Part A represents short-term capital gains, interest and dividend income. Part B consists of taxable income that is not included in Parts A or C. Part C income includes long-term capital gains. For the purpose of determining the $1 million threshold for the surtax, a taxpayer’s taxable income from all three parts are added together. However, if the taxable income from any of these individual parts is negative, it will be treated as $0 instead. As such, only positive taxable income resulting from each of these parts will be added together for the purpose of this surtax calculation.
  • Income that is considered to be non-taxable for the purpose of the regular Massachusetts income tax will also be excluded from the calculation of the surtax. For example, interest income from U.S. Treasury and Massachusetts municipal obligations will not be included in the calculation of income that is subject to the surtax. Also, the portion of gain exclusion allowable for sale of primary residence that is not subject to the regular income tax is also excluded for the surtax computation.
  • The 4% surtax will be included as part of the estimated tax underpayment penalty calculation.
  • If an extension is being filed for the April deadline, this surtax will also need to be paid by then for determination of a valid extension. 

Charitable Contribution Deduction
Originally slated for 2021 tax year, there has been a long delay on the reenactment of the Massachusetts charitable tax deduction. This deduction has finally been reinstated for the 2023 tax year. Taxpayers who made eligible charitable donations can now take the deduction against their Massachusetts Part B taxable income, even for taxpayers who do not itemize deductions on their federal income tax returns. The charitable contribution must meet all the requirements for deductibility under the Internal Revenue Code 170. To the extent that there is any excess deduction for the tax year, the amount can be carried forward for up to five years. For those with annual income in excess of $1 million who will now be subject to a surtax of 4%, this deduction may soften the impact of the Millionaire tax.

Given all of the recent changes to Massachusetts estate and income tax laws, it is always prudent to speak with your tax professional and financial advisor on how these changes may impact you and to discuss any planning opportunities that may exist as a result of this legislation.

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