On October 4th, Massachusetts Governor Maura Healey signed a $1 billion tax relief and reform bill that the Massachusetts House and Senate passed the previous week. The overwhelmingly favorable votes were 155-1 in the House and 38-1 in the Senate. The bill represents one of the Governor’s key priorities and is entitled “An Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity.” The bill has potential benefits for Massachusetts families, businesses, and individuals throughout the state at both low and high-income levels. Of note, higher net worth households could see savings under the estate tax cut that finally materialized after years of rejected proposals.
Highlights of the Massachusetts Tax Relief Bill
Keep in mind the changes mentioned are all at the state level, not federal.
Expanded Child & Dependent Tax Credit
The bill eliminates the maximum number of eligible dependents that can be claimed and increases the credit. The child and dependent tax credit would increase from $180 to $310 per dependent for the 2023 tax year. The credit increases in 2024 to $440. To see if you received a credit in 2022 look at line 46 of your state tax return. If you still have eligible dependents, you should see this figure increase on your 2023 return.
Rental Deduction Increase
Under current law, certain renters can deduct up to $3,000 of rent paid (line 14 of your 2022 state return). Taxpayers with higher incomes may not qualify as the deduction is primarily designed to provide relief to low and moderate-income families. The bill increases the potential maximum deduction to $4,000 for 2023.
Lower Short-Term Capital Gains Tax Rate
The current state tax rate on short-term capital gains (assets held 1 year or less) of 12% is reduced to 8.5%. The rate on long-term capital gains remains 5%.
Increased Estate Tax Exemption
A credit of up to $99,600 on estate taxes will reduce the tax for anyone subject to it and eliminate the tax entirely for estates under $2 million. The long-anticipated increase in exemption from $1 million to $2 million is not indexed for inflation going forward. This change is effective retroactively to January 1, 2023. Anyone involved with an estate from a death this year should touch base with legal and/or tax advisors to determine if this change impacts decision making with the estate. Some married couples may still need to act to fully benefit in the future, even if you have already done estate planning. If your account titles, beneficiaries, and estate documents were designed to fund a credit shelter trust with $1 million at the death of the first spouse, you may need to review your plan to determine if should now aim to fund a credit shelter trust with $2 million at the first death. We expect this to be an important area of discussion with many clients.
Other Measures to Assist Lower-Income Residents, Seniors, and Homeowners
In addition, the bill increases the earned income tax credit from 30% to 40% of the federal credit and doubles the maximum senior circuit breaker credit from $1,200 to $2,400. Homeowners may receive increased credits for lead paint abatement in older homes and access to a septic system replacement or repair tax credit that will increase from $6,000 to $18,000, with a maximum of $4,000 claimable per year.
Lastly, the bill contains two provisions related to recent events. Married taxpayers who file a joint return with the federal government will be required to file a joint state return. This measure is meant to prevent a possible tax reduction technique stemming from the new millionaire’s tax. And, if any refund payment is made under Chapter 62F, as they were for the 2021 tax year, those payments will be made equally amongst taxpayers – not pro rata based on actual taxes paid.
Staying abreast of changes to legislation is just one of the ways our financial planning team helps our clients keep more of their wealth.
If you are a client of Heritage Financial, there is nothing for you to do at this time. Our Financial Planning team will be incorporating these changes into our planning strategies for our Massachusetts-based clients.
If you are not yet a client of Heritage Financial and would like to learn more about our detailed financial planning process Let’s Talk.
