Massachusetts Eliminates Taxation on Full Value of Smaller Estates

Just one week after Bill H. 4104 was approved 38-1 by the Massachusetts House of Representatives, Governor Maura Healey signed the $1 billion Tax Relief Bill into law. The new law aims to help the economy by making the state both more attractive to businesses and more affordable for its residents.

Among other items, the sweeping legislation increases the Earned Income Tax Credit from 30% to 40%, increases the cap on the rental deduction from $3,000 to $4,000, reduces the short-term capital gains tax from 12% to 8.5%, and closes the “Millionaire tax” loophole we wrote about last February. The law is expected to provide taxpayers with $561 million in relief in the current fiscal year and to exceed $1 billion a year when fully phased in by 2027. A comprehensive summary of the bill is available from the Pioneer Institute.
One important section of the new law affects the Commonwealth’s estate tax. It raises the threshold at which estates will be taxed, potentially saving many Bay Stater heirs a significant sum.

Background of the Massachusetts Tax Relief Bill
Massachusetts is one of 12 states with an estate tax and one of only two states that taxes estates with values as low as $1 million. And while other states and the federal government only amounts above a certain threshold, Massachusetts is unique in that it taxes the entire value of estates over $1 million. This creates what is known as a “cliff effect,” meaning that even relatively small estates may pay many thousands in taxes.

This limit had not kept pace with rising home values, so it disproportionately affected families with high-value properties and encouraged older residents to move to tax-friendlier states.

New Massachusetts Estate Tax Regulations
The new law represents the first increase in the state’s estate tax exemption since 2006. (The federal estate tax exemption, on the other hand, has increased from $2 million to $12.92 million over the same timeframe. It is scheduled to be reduced on January 1, 2026, but will still be significantly higher than the Massachusetts threshold.)

The new law increases Massachusetts’s current estate tax filing threshold from $1 million to $2 million. The new law applies to estates of decedents who died on or after January 1, 2023. Estates that are valued at $2 million or less will not be subject to estate tax.

The new law also provides a maximum uniform estate tax credit of $99,600 per estate, effectively eliminating the cliff effect for estates that are just over the threshold. Now, instead of paying taxes on the full amount of any estate worth over $1 million, there will be no tax due on the first $2 million and only amounts above that will be taxed.

The new amount of $2 million is not indexed for future inflation and is not “portable” between spouses, meaning that a surviving spouse cannot make a special tax election to transfer their deceased spouse’s applicable exclusion to themselves.

Steps You Can Take
If you are a taxpayer in Massachusetts with assets of $1 million or more, we suggest reviewing your estate plan goals with a qualified CPA. Married couples may wish to make use of a bypass trust as part of their estate planning in order to fully utilize estate tax credits for both spouses.

Similarly, if you are an heir of someone who died in 2023, a qualified CPA can help ensure that the estate pays only what it needs to in taxes. Tonneson CPAs are here to help. Contact us today

Contact us at Tonneson + Co today to learn how we can help.