2023 Brings Significant Change to Massachusetts Tax Regime for Individual Taxpayers

by  Chris Hernandez, JD, Associate & Luidgi Andou, JD, MBA, Associate

The long-awaited Massachusetts tax reform bill has finally been signed into law by Governor Healey. The legislature passed a $1 billion tax package (House Bill 4104) that will affect every taxpayer in the Commonwealth. The tax bill covers the filing status of married taxpayers, changes to deductions and credits, the estate tax exemption, the short-term capital gains tax, and clarifies questions about the Massachusetts’ Millionaires Tax. The Department of Revenue also recently issued a release that clarifies the tax treatment of qualified small business stock.

Estate Tax Exemption

For decedents who pass away on or after January 1, 2023, the estate tax exemption amount is increased from $1,000,000 to $2,000,000. The legislation also clarifies that the entire estate would not be subject to estate tax. Only assets exceeding the $2,000,000 exemption amount would be subject to estate tax, which is a departure from previous law, which taxed the entire estate not just the amount that exceeded the exemption. The legislature declined to index the exemption for inflation.

Short Term Capital Gains Tax

Beginning tax year 2023, the short-term capital gains tax will be reduced from 12% to 8.5%. Long-term capital gains tax and the capital gains tax on collectibles remain untouched at 5% and 12%, respectively.

The Millionaires Tax*

Last year, in a ballot initiative, Massachusetts taxpayers approved a 4% tax on taxpayers with annual taxable income over $1 million. The legislature opted to create a new calculation of Massachusetts gross income in the application of this surtax. Massachusetts will separate taxpayer income into three categories: Part A) representing "passive" income such as dividends, long-term gains from collectibles, etc., Part B) which encompasses earned income such as wage, Sch. C (personal businesses, sole proprietorship, etc.), and Sch. E income (rent and royalty income), and Part C) which embodies gains from the sale of capital assets held for longer than one year. In determining the sum of each part, any part that is negative is treated as 0, and only parts with positive taxable income amounts are added together. If the sum of Parts A, B, and C exceed $1 million, the portion that exceeds $1 million is taxed at the typical rate plus an additional 4%.

Married Couples & Filing in Massachusetts

Tax year 2023 is the last tax year in which a married couple that files in Massachusetts may file separately on their Massachusetts returns while still filing jointly on their federal returns. For tax years after January 1, 2024, married couples that file a joint federal return must also file a joint Massachusetts return. Further, the Department of Revenue is authorized to make adjustments to Massachusetts return forms to allow for exemptions for spouses who are non-residents of the Commonwealth. Couples that find it advantageous to file separately because of the millionaire’s tax should consider this option for 2023. To see if it is advantageous from a tax standpoint to file separately versus filing jointly, please consult your GW & Wade Counselor.

The Dependent Tax Credit

The tax credit for dependents has been increased from $180 per dependent to $310 per dependent for tax year 2023. This includes senior and disabled dependents. For tax years 2024 and beyond, the per dependent credit will increase to $440.

The Commuter Transit Deduction

The Massachusetts Commuter Transit deduction has been expanded to include all commuter MBTA fares, ferry/regional transit passes, and bicycle commuter expenses. Previously, the deduction only included tolls paid through an E-Z pass account and weekly or monthly passes for commuter transit on MBTA trains, buses, and certain commuter lines. Some limitations will remain in that the deduction will still only apply to expenses over $150, and the limit remains at $750 per individual /$1500 for a married couple filing jointly.

The Rental Deduction

At present, Massachusetts allows a deduction from gross income for 50% of the rent paid during the tax year, up to $3,000. The limit will now be increased to $4,000 for tax year 2023.

Expanding the Qualified Small Business Stock (“QSBS”) Exclusion

Tax Information Release 23-5, released March 1, 2023, acts to clarify the Commonwealth's conformity to select provisions of the 2022 Internal Revenue Code. Taxpayers may find the revision to the treatment of the sale or exchange of qualified small business stock ("QSBS") held for more than five years most beneficial. Previously, Massachusetts conformed to the 2005 Internal Revenue Code's treatment of QSBS, which allowed for only 50% of the gain from such stock to be excluded from federal gross income. The new guidance clarifies that Massachusetts will now conform to the IRS’s 100% exclusion with respect to sales or exchanges of QSBS that occur on or after January 1, 2022. In the case of gain that is not eligible for the federal exclusion (usually driven by stock that is issued by an S corporation) such gain would be taxed at a reduced rate of 3% rather than the ordinary income rate.

These tax changes will certainly yield positive tax benefits to many taxpayers. GW & Wade has decades of experience guiding our clients through complex tax changes like these. Should you have any questions, your GW & Wade Counselor is always available to walk you through the potential and projected effects of this massive tax bill and any future pending legislation. If you have any questions, please do not hesitate to contact your Counselor or you can reach us at info@gwwade.com.

*Updated November 20, 2023

Investment advisory services offered through GW & Wade, LLC.

The information provided above is the opinion of the author, general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship. 

This article contains forward-looking statements, predictions, and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. 

Chris Hernandez, JD, Associate & Luidgi Andou, JD, MBA, Associate


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