Executive summary: Massachusetts offers tax relief and taxpayer-friendly changes
On Oct. 4, 2023, Massachusetts Gov. Maura Healey signed House Bill 4104, a compromised tax relief bill following the earmarking of almost $600 million for tax relief from the fiscal year 2024 budget signed in early August. The tax relief package includes the adoption of a single-sales factor for all corporate taxpayers, a filing change for married taxpayers, a reduction of the short-term capital gains tax, an increase of the estate tax credit and a number of other tax relief measures and credits for individual taxpayers.
Massachusetts fulfills tax relief promise
Single-sales factor for corporate net income tax
Effective for tax years beginning on and after Jan. 1, 2025, House Bill 4104 adopts single-sales factor apportionment for purposes of the state’s corporate net income tax. As of 2023, well over half of the states employ a single-sales factor methodology. Montana also enacted single-sales factor this year, effective in 2025.
Short-term capital gains tax rate reduction
Massachusetts imposes a 12% tax rate on short-term capital gains. That tax rate is over twice the state’s individual income tax rate of 5% and, when including the additional 4% Millionaires’ Tax, can be as high as 16%. Gov. Healey’s original call for tax relief included a provision to reduce the short-term capital gains rate to 5%. Ultimately, the legislature compromised on a reduction to 8.5%, effective Jan. 1, 2023.
Married taxpayers filing conformity
House Bill 4101 mandates that married couples file joint returns in any year which a joint federal return is filed. The filing change is effective for tax years beginning on or after Jan. 1, 2024. The change was prompted by concern that married taxpayers filing separately could reduce exposure to the state’s new 4% Millionaires’ Tax on income over $1 million. For information on the millionaires’ tax including planning considerations, please read our article, Voters approve Massachusetts Millionaires’ Tax.
Individual and estate tax relief measures
The tax relief bill provides a number of relief measures for individual taxpayers. A summary of those measures follows below:
- For estates of decedents passing on or after Jan. 1, 2023, a credit of up to $99,600 is allowed against the tax. The credit essentially eliminates the estate tax for estates under $2 million
- Creates a new tax credit for dependents of $310 for 2023 and $440 for 2024
- Increases the earned income tax credit to 40% of the federal credit
- Increases the cap on the rental deduction to $4,000
- Raises the annual authorization for the low-income housing tax credit from $40 million to $60 million
- Increases the septic system tax credit to a maximum of $18,000
Takeaways
Gov. Healey has focused on tax relief since taking office in January. As explained by the state senate’s president, the $580 million earmarked in the state budget resulted in a tax relief package estimated cost of about $560 million for fiscal year 2024 and a $520 million impact on the budget, and a $1 billion impact by fiscal year 2027. Also noteworthy, and unlike last year, the state did not generate enough collections in fiscal year 2023 to create an individual income tax refund. Tax collection growth has slowed among most states as revenues fall back to pre-pandemic growth rates and one-time federal stimulus funding programs end.
The reduction in the short-term capital gains tax rate and the adoption of single-sales factor may help create a more business friendly environment, although the fallout from last year’s Millionaires’ Tax approval may not be determinable for several years. Taxpayers should closely consider the tax regime when planning for new or expanded businesses in the state as well as comprehensively evaluating the impact to individual income taxes.
Taxpayers with questions about the tax relief bill should speak to their Massachusetts state and local tax advisers.
