Breaking the Code: Massachusetts Estate Law Changes for Tax Year 2023
By: Autumn Hale, CPA
Significant changes to Massachusetts estate tax laws were signed into legislation by Governor Maura Healey under The Act to Improve the Commonwealth’s Competitiveness, Affordability, and Equity (The Act) in early October. These changes retroactively apply to the entirety of 2023 and impact Massachusetts residents, non-residents who hold property in Massachusetts, those administering estates, and those earning taxable income in Massachusetts.
Massachusetts Estate Tax Changes
In tax years prior to 2023, Massachusetts estate tax only applied to estates valued over $1 million. The Act changes this to $2 million beginning with tax year 2023. In the past, the $1 million was more of a threshold rather than an exemption. If a decedent’s estate was valued over $1 million, the entire estate was subject to tax, not just the portion over $1 million. Under The Act, however, the $2 million is a true exemption and only the portion of the estate valued over $2 million will be taxed. This removes the cliff effect that estate tax previously faced. The tax will be calculated using a graduated rate beginning at 7.2% and increasing to a maximum of 16% for taxable estates more than $11 million. In some cases, even if no tax is due on the estate, a Massachusetts estate tax return will still need to be filed.
Unlike the federal estate tax exemption which increases each year to account for inflation, the Massachusetts $2 million threshold will remain as such until a new law is passed to change it. It is not adjusted annually. The Massachusetts exemption was last changed in 2006, so it is likely that it will stay unchanged for the next several years.
Non-Resident Implications
The Act also implicates Massachusetts non-residents who hold property in the Commonwealth and residents with property in other states. If a Massachusetts resident dies holding property outside of the Commonwealth, the Massachusetts estate tax will be reduced proportionately by the value of that property. Non-residents owning property in Massachusetts, who have a total taxable estate over the $2 million threshold, will also be subject to Massachusetts estate tax. They will pay Massachusetts estate tax in an amount proportionate to the value of the property owned in the Commonwealth.
Filing Implications
If you have already filed an estate tax return for a decedent who died on or after January 1, 2023, and the value of the estate was below the $2 million dollar exemption, there is no action required. The state will review all returns and recalculate the tax based on the $2 million dollar exemption. If there is an overpayment on the account after review, a refund will be issued. All returns are reviewed in the order they were filed and received.
If you need to file a return for a decedent that passed on or after January 1, 2023, the Massachusetts Department of Revenue (DOR) recommends filing an extension. Currently the DOR is working to update their systems and estate tax forms. When filing an extension, calculate the tax based on the new tax law and pay the amount by the original filing date. The DOR expects all systems and forms to be updated by the extended due date. If you are unable to extend the return, you may file the return based on the statute in effect prior to January 1, 2023. The return will then be reviewed and any excess tax paid will be refunded.
If you have any questions on the estate tax law changes, please reach out to your tax team to schedule a call at your convenience. if you haven’t revised your estate plan recently, we are happy to provide a recommendation for estate attorneys that will be able to assist with new or revised estate documents.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.