May 11, 2023
By: William A. Morgan and Suzanne Brown Walsh
On April 13, the Massachusetts House of Representatives approved H.3770, a tax reform bill that includes significant changes for individuals, businesses and estates. The bill is now with the Senate’s Ways and Means Committee, though no hearings have been scheduled. The Senate has until the end of its two-year term in December 2024 to act on it.
The bill comes on the heels of the Commonwealth’s 2022 refund of almost $3 billion to taxpayers under Chapter 62F, which is a voter-approved law where tax collections above a certain threshold are returned to individual income taxpayers. Most of H.3770’s changes are effective retroactive to January 1, 2023 though some will be phased in over a period of several years.
1. H.3770’s Changes for Tax Year 2023
Estate Tax – H.3770 increases the estate tax threshold from $1 million to $2 million. Perhaps more importantly, the bill eliminates the so-called “cliff effect” of the current estate tax. The “cliff effect” means that estates exceeding $1 million by even one dollar are taxed on the entire estate, not just the amount exceeding $1 million. H.3770 eliminates the “cliff” by providing that only the amount of the estate exceeding $2 million is subject to tax. The bill does this by subtracting $2 million from each estate. This proposal differs somewhat from Governor Healey’s late February proposal to eliminate estate tax for estates up to $3 million by providing a tax credit up to $182,000.
Thus, the proposal attempts to address the inadequacy of the Massachusetts’ exemption, currently tied with Oregon’s for the lowest among the 12 states with an estate tax. All of Massachusetts’ New England neighbors have higher thresholds: Rhode Island’s current threshold is $1.73 million, Connecticut’s $12.92 million, Maine’s $6.41 million, New York’s $6.58 million, and Vermont’s $5 million. Massachusetts’ low threshold means it taxes more modest estates relative to its neighbors.
The explosion of real estate values in eastern Massachusetts exacerbates this problem. Even a $2 million exemption does not “cover” a relatively modest home in some towns. According to data from the Greater Boston Real Estate Board, the median sales price for a single-family home across all 64 towns comprising the Greater Boston area, was $830,000 in March 2023. This was not lost on Governor Healey, who in her February 27, 2023 press release announcing her proposal proclaimed that reforming Massachusetts’s estate tax “[W]ould reduce the tax burden on smaller estates, which historically have filed over 70 percent of estate tax returns, and helps seniors and families age in place and be able to stay in Massachusetts.”
Short-Term Capital Gains – Massachusetts currently taxes short-term capital gains (gains on assets held under one year) at 12%. H.3770 reduces the income tax rate on short-term capital gains to 8% for tax year 2023, then in 2024 reduces it again to 5%, which is the current tax rate for income and long-term capital gains.
Senior Circuit Breaker Tax Credit – The senior circuit breaker tax credit is a refundable credit based on the actual real estate taxes or rent paid on Massachusetts residential property seniors own or rent and occupy as a principal residence. H.3770 doubles the cap on the senior circuit breaker tax credit, from $1,200 to $2,400.
Earned Income Tax Credit – Currently, Massachusetts allows a credit of 30% of the amount of federal earned income tax credit. H.3770 raises the Massachusetts credit to 40% to match of the federal earned income tax credit.
Child and Dependent Tax Credit – The Massachusetts child and dependent care credits are available for those taking care of children, dependent, or disabled persons, H.3770 increases to $600 the child tax credit, and eliminates the current two-dependent per family cap on that credit. The size of the credit would become $310 in tax year 2023, $455 in tax year 2024, and $600 in tax year 2025.
Income Tax Refunds/Chapter 62F – Chapter 62F of the Massachusetts General Laws requires that the Commonwealth send income tax refunds to taxpayers if the total tax revenues exceed an annual cap tied to wage and salary growth. This lesser-known law took center stage last year when the tax revenues exceeded the annual cap by nearly $3 billion. In accordance with Chapter 62F, the refunds were issued on a proportional basis based on one’s personal income tax liability, so those who paid more received more of the Chapter 62F refunds. H.3770 proposes to change the requirement that tax refunds be distributed “on a proportional basis” according to tax liability, and instead provide the refunds be equal for all taxpayers, no matter how much they paid in income taxes.
2. H.3770’s Changes for Tax Year 2025: Move to Single Sales Factor Apportionment
Massachusetts’ present corporate tax apportionment formula treats industries differently, instead of uniformly. For example, the Commonwealth applies a single sales factor apportionment to manufacturing companies, defense contractors, and financial service providers. This means Massachusetts taxes the net income of these three business categories by multiplying the companies’ overall net income by the ratio of Massachusetts sales to overall sales. In other words, if ten percent (10%) of a manufacturing company’s sales are in Massachusetts, then ten percent (10%) of the company’s net income will be subject to tax.
However, all other businesses doing business here are taxed based on a type of apportionment using three factors that double weights the sales factor. They are (1) where company sales are generated (50%), (2) where company payroll is located (25%), and (3) where company physical property is located (25%). This apportionment method sometimes increases the tax for companies that choose to bring jobs and development to the Commonwealth. Companies other than manufacturers, defense contractors, and financial service providers should review their Massachusetts tax particulars to determine if the move to a single factor will benefit them or not.
We encourage you to connect with your counsel to have your current planning reviewed regarding estate planning and business tax planning opportunities available should these proposals become law in 2023. Such a review can also ensure that your estate plan continues to reflect your intentions and is up to date with your current circumstances.
If you have any questions, please contact Bill Morgan, Trusts & Estates Counsel, at 617-457-4061 or wmorgan@murthalaw.com or Suzanne Brown-Walsh, Partner, Trusts and Estate Chair, at 860-240-6041 or swalsh@murthalaw.com.
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