To improve the Commonwealth’s competitiveness, affordability and equity, Massachusetts Governor Maura Healey signed the Massachusetts Tax Relief Bill into law on October 4, 2023. The bill (H.4104) includes a wide range of tax changes aimed at providing relief to families, businesses and individuals throughout the state.

This tax alert discusses the details of the tax relief bill as follows:

• The bill enacts a single sales factor apportionment formula for all corporations (including C and S), partnerships and financial institutions effective tax year 2025. Under current law, business entities generally are required to apportion their net income using a three-factor formula.
• The bill repealed the existing rule in which if the denominator is less than 3.33 percent of taxable net income then the factor would be inapplicable.
• The bill reduces the short-term capital gains rate from 12 percent to 8.5 percent effective Jan. 1, 2023. The long-term capital gains rate remains unchanged i.e., 5 percent.
• Effective for the estates of decedents dying on or after Jan. 1, 2023, the tax threshold for the estate tax is increased from the current $1 million to $2 million with the tax imposed on revenue above the $2 million threshold.
• The bill mandates that married couples file joint state returns for any year in which a joint federal return is filed. The filing change is effective for tax years beginning on or after Jan. 1, 2024.
• Review additional details of the tax relief bill here.

GHJ’S OBSERVATIONS

• Single Sale Factor: The shift to a single-sales factor apportionment formula may affect the calculation of a business corporation’s taxable net worth. In addition, the change in apportionment formula will place additional burden on business entities that ship goods from Massachusetts and thus such entities may be required to throw back sales to Massachusetts for non-filing jurisdictions. (Note that there are no changes to the existing throwback rules in Massachusetts.) Taxpayers should review and plan accordingly since the change in single-sales factor may not go into effect until tax year 2025.

• Massachusetts Estate Tax: The law is retroactive to Jan. 1, 2023. As a result, the estates of those who died in 2023 who paid the Massachusetts estate tax may be entitled to a refund. The change in law may have an impact on existing estate plans, which should be revisited.

• Millionaire’s Tax: Under current law, a couple that files a married filing joint federal return is allowed to file a married filing separate Massachusetts return. Therefore, a married couple whose combined income exceeds $1 million can reduce or eliminate the 4-percent surtax by filing a separate state tax return.

The newly passed bill includes a provision requiring a married couple to file a joint Massachusetts return for any year in which the couple files a joint federal income tax return. However, if one spouse is a nonresident of Massachusetts then the state may allow separate filings. As such, this new rule is designed to prevent married couples from filing separate Massachusetts tax returns simply to avoid or minimize the imposition of the millionaire’s tax.

• Pass-Through Entity Tax (PTE): Under current law, the tax rate of the PTE is 5 percent. A qualified member of an electing PTE is eligible for a refundable credit equal to 90 percent of PTE tax paid. As such, the bill requires the Massachusetts Department of Revenue to analyze whether the PTE tax rate may be increased up to 9 percent to provide taxpayers an additional benefit of a PTE election. The Department of Revenue is required to submit its report to the Legislature no later than Feb. 1, 2024.

Taxpayers should examine the facts and circumstances to determine whether any planning in Massachusetts will result in tax benefits. For any further assistance or questions related to Massachusetts legislative changes, please reach out to GHJ’s State and Local Tax Team.