October 2023 saw the passage of a bill providing $1B in tax cuts for Massachusetts taxpayers. With a new tax filing season upon us, it’s time to discuss some of the notable Massachusetts personal income tax law changes included in this bill as well as other recent legislated changes to MA tax laws.
Click on the links in certain headers for more details.
Charitable Contributions Deductions
Approved by voters in a 2000 initiative, the long-delayed charitable contributions deduction has arrived on 2023 MA tax returns! Individuals filing a Massachusetts tax return (including non-residents and part-year residents) can claim a deduction for charitable contributions made during the year.
- In general, the same type of contributions deductible on a federal tax return are deductible on your MA tax return.
- You are not required to itemize deductions on your federal income tax return to claim the MA deduction.
- No MA deduction is allowed for contributions of household goods or used clothing.
- The MA deduction can be used to reduce all income except interest, dividends, and capital gain income.
- Contributions greater than eligible income can be carried forward and deducted against eligible income for up to 5 years.
- Contributions greater than eligible income can be carried forward and deducted against eligible income for up to 5 years.
Surtax on Taxable Income over $1M
In 2022, Massachusetts voters approved a 4% surtax on all individual and trust tax returns with taxable income that exceeds a threshold amount. That threshold is $1M for tax year 2023 which is how this provision earned the name “The Millionaires Tax”. Only the portion of the taxpayer’s income that exceeds the threshold is subject to the surtax which is indexed for inflation annually. For the 2024 tax year, the threshold is $1,053,750.
Joint Return Requirement
To prevent married couples from splitting their income between two separate returns to avoid the Millionaires Tax, a provision in the October 2023 tax bill requires any couple filing a joint federal income tax return to also file a joint Massachusetts return. This provision takes effect in 2024. Clarification is yet to be provided in cases where one or both spouses are non-residents.
Short Term Capital Gains
Beginning in 2023, the tax rate on short-term capital gains (assets held for one year or less) is reduced from 12% to 8.5%.
Child and Family Tax Credit Expansion
MA residents are allowed a credit if their household includes a child under 13, a disabled dependent or spouse, or a dependent age 65 or older. Under prior law, the credit was $180 per qualified individual with a limit of 2 qualifying individuals. For 2023, the credit amount increases to $310 for each qualified individual with no limit on the number a taxpayer can claim. For 2024, the credit amount increases to $440 per individual.
Rental Deduction
The maximum rental deduction – calculated as ½ of rent paid for a principal residence in MA – is increased from $3,000 to $4,000 (from $1,500 to $2,000 if married filing separately) starting in 2023.
Deduction for Employer-Provided Student Loan Payment Assistance
For tax years beginning January 1, 2023 employees may deduct employer provided student loan payment reimbursements (principal and interest) that EXCEED $5,250 (The first $5,250 of reimbursement are excluded from federal and MA income.) Employees may not separately deduct student loan interest for the same employer reimbursement.
Estate Taxes
This is a BIG change which was a long time coming. Under prior law, the estate of a Massachusetts resident (or non-resident owning property in the state) was subject to estate tax only if it exceeded $1M. If the $1M threshold was breached, the entire value of the estate was subject to the estate tax. The new legislation doubles the estate tax exemption to $2M and applies the estate tax to only the assets in excess of $2M. These changes are applicable retroactively to individuals dying on or after January 1, 2023.
Another significant change is that the calculated estate tax is reduced by the proportion of the entire gross estate that consists of real property located outside of Massachusetts.
While a step in the right direction for MA residents, the $2M MA estate tax exemption is a static amount that is not adjusted for inflation. In addition, the exemption amount is far less than other states. Lastly, unlike the federal estate tax exemption that can be transferred to a surviving spouse if it is not used in its entirety, the MA estate tax exemption is not portable.
One of the reasons Massachusetts made the change was to be more competitive with other states. They fell far short.
Various Other Changes
- Circuit Breaker Credit – Base amount has doubled, maximum credit $2,590.
- Increase in Earned Income Credit – Increased from 30% to 40% of the federal earned income credit.
- Increase in Lead Paint Credit – Doubled to $3,000 for full removal. Partial removal also doubled to $1,000.
- Increase to Septic Tax Credit- Increased from $1,500 to $4,000 annually and the project cap tripled to $18,000 in total credits. The percentage of allowable expenditures used to calculate the credit increased from 40% to 60%.
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By Joanne Tackes
Joanne is a Certified Public Accountant and Financial Planner on our team who believes that no financial decision should be made without knowledge of the tax consequences. Her methodical approach to financial planning leaves no stone unturned as she works diligently to provide you with a comprehensive financial plan.
