Anaya Nolan
Massachusetts tax laws have undergone significant changes in recent years, impacting both residents and businesses. These laws cover a range of taxes, including personal income tax, corporate excise tax, estate tax, and property tax. For instance, Massachusetts has a flat income tax rate of 5% on annual gross income over $8,000, with an additional 4% tax on income exceeding $1 million. The state's tax laws also provide various deductions and credits, such as the rental deduction, which increased to $4,000, and the child tax credit, which rose to $310 in 2023 and $440 in 2024. In contrast to other states, Massachusetts does not offer a standard deduction but allows residents to claim certain tax exemptions based on their filing status and dependents. The state's tax code also differs from federal tax law in specific areas, such as capital gains taxation and the treatment of excess business losses. These changes aim to improve competitiveness, affordability, and equity for Massachusetts residents and businesses.
| Characteristics | Values |
|---|---|
| Income tax | 5% for most earners, 9% for income over $1 million |
| Rental deduction | $4,000 |
| Child tax credit | $440 (from 2024) |
| Senior Circuit Breaker Tax Credit | $2,400 |
| Title V (Septic) Tax Credit | $18,000 |
| Corporate excise tax | Based solely on sales |
| Estate tax | $2 million exemption |
| Motor vehicle and trailer excise | Payable upon registration |
| Personal income tax | Gross income over $8,000 must file a tax return |
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What You'll Learn
Massachusetts income tax return filing requirements
Massachusetts has a state income tax. If you are a resident of Massachusetts and your gross income was more than $8,000, you are required to file a Massachusetts income tax return. This applies whether the income was from sources inside or outside of Massachusetts. If your gross income was $8,000 or less, you do not need to file a return.
If you are a part-year resident with gross income of more than $8,000, whether received inside or outside Massachusetts, you must file a Massachusetts tax return. If you are a non-resident with annual Massachusetts gross income of more than $8,000 or the prorated personal exemption (whichever is less), you must file a non-resident Massachusetts income tax return.
Full-year residents use Form 1: Massachusetts Resident Income Tax Return. Part-year residents use Form 1-NR/PY: Massachusetts Nonresident/Part-Year Tax Return.
There are a number of differences between Massachusetts state tax law and federal tax law. For example, Massachusetts taxes most long-term capital gains at 5% and taxes long-term gains from the sale or exchange of collectibles at 12% (subject to a 50% deduction). For tax years beginning on or after January 1, 2023, the tax rate on short-term gains from the sale or exchange of capital assets is 8.5%. Massachusetts does not allow the federal standard deduction, nor does it recognise the filing status of Qualifying Widow(er) with dependent child. Massachusetts also does not allow federal Schedule A deductions, nor does it allow the federal deduction for qualified business income.
There have been several recent changes to Massachusetts tax laws. For example, the child tax credit has increased from $180 to $310 for 2023 and $440 beginning in 2024, and is no longer capped at two dependents. The threshold for a taxable estate has increased from $1,000,000 to $2,000,000 effective for decedents dying on or after January 1, 2023. Additionally, from January 1, 2024, couples filing married filing joint federally must file a joint Massachusetts return.
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Estate tax changes
Increase in Estate Tax Exemption:
The Massachusetts estate tax exemption has increased from $1 million to $2 million. This change was enacted as part of a $1 billion tax reform package signed into law by Governor Maura Healy on October 4, 2023. The increased exemption amount applies retroactively to estates of decedents who died on or after January 1, 2023. This change addresses the "'cliff effect' of the previous law, which taxed the entire estate over $1 million, whereas the new law only taxes assets exceeding $2 million.
Tax Return Requirements:
The higher exemption amount has resulted in changes to tax return requirements. For decedents dying on or after January 1, 2023, a Massachusetts Estate Tax Return (Form M-706) must be filed if the gross value of the estate, plus adjusted taxable gifts, exceeds $2 million. This applies to both residents and non-residents who own property in Massachusetts.
Credit Against Estate Tax:
The tax package also introduced a credit of $99,600 against the Massachusetts estate tax, further reducing the tax burden on estates. This credit is available for estates of decedents who died on or after January 1, 2023.
Proportional Taxation of Out-of-State Property:
Another important change is the proportional taxation of out-of-state property. Under the previous law, if a decedent had property in multiple states, only the value of the Massachusetts property was considered for taxation. Now, the taxable estate is reduced by the percentage of out-of-state property. For example, if 25% of the gross estate consists of real property in another state, the taxable estate in Massachusetts would be reduced by 25%.
These changes to the estate tax laws in Massachusetts aim to boost affordability for residents and businesses, increase the state's economic competitiveness, and provide clarity on tax obligations for those with estates exceeding the new threshold.
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Rental deduction increases
In Massachusetts, a taxpayer may claim a deduction for rent paid to a landlord during the tax year if their principal residence is located in the state. This deduction is limited to 50% of the rent paid and cannot exceed $4,000. The deduction is based on the amount of rent each person paid and only applies to amounts paid specifically as rent.
The rental deduction in Massachusetts has undergone several changes over the years. When it initially took effect in 1981, there was no limit to the deduction, and tenants could write off half of their rent payments. However, the state quickly capped the deduction at $2,500 to limit revenue loss. This cap remained in place until 2001 when it was raised to $3,000 to keep up with rising housing costs. In 2023, the deduction limit was increased again to $4,000.
Despite this increase, some lawmakers and activists have pushed for a larger rental deduction. They argue that the current deduction does not provide significant relief to renters facing high housing costs. For example, State Sen. Lydia Edwards has advocated for doubling or tripling the deduction as a matter of "equity." Similarly, State Rep. Rob Consalvo proposed an amendment to increase the deduction cap to $6,000, and up to $9,000 for lower-income renters.
The Massachusetts rental deduction increase is part of a broader set of tax changes in the state. Other notable changes include an increase in the child tax credit from $180 to $310 in 2023 and $440 beginning in 2024, the removal of the cap on the number of dependents for this credit, and an increase in the Senior Circuit Breaker Tax Credit from $1,200 to $2,400.
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Child tax credit increases
Massachusetts has a 5% tax on both earned and unearned income. If you are a resident of Massachusetts and your gross income is more than $8,000, you must file a Massachusetts income tax return.
Child and Family Tax Credit
Massachusetts offers a Child and Family Tax Credit for qualifying individuals. Starting with the 2023 tax year, a Massachusetts taxpayer may claim the Child and Family Tax Credit for one or more qualifying individuals who do not have a Social Security number (SSN) or an Individual Taxpayer Identification number (ITIN). To do so, the taxpayer must file a return using a Massachusetts Alternative Taxpayer Identification number (MATIN) for the qualifying individual.
The Child and Family Tax Credit is now $440 for every dependent child, disabled adult, or senior, up from $180 before the bill was passed and $310 in 2023. The law also eliminated the two-dependent cap, meaning there is now no limit to the number of dependents for which a taxpayer can claim a credit.
To claim the Child and Family Tax Credit, you must file a Massachusetts income tax return, even if you don't have any income to report.
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Corporate excise tax assessments
Corporate excise tax is imposed on certain businesses operating in Massachusetts. Generally, all corporations operating in the state, including foreign corporations, are subject to this tax. The corporate excise tax is based on net income and either tangible property or net worth. The net income measure is based on gross income for federal tax purposes, with certain additions and deductions. For instance, corporations can deduct business expenses from gross income earlier than is typical, reducing taxable income and effectively deferring taxes.
The effective excise tax rate is 9.5% of net income apportioned to Massachusetts and $2.60 per $1,000 of the value of Massachusetts tangible property or net worth allocable to the state. The minimum tax is $456. The taxable period for corporations is either the calendar year or the corporation's fiscal year, with estimated payments made every three months.
Massachusetts recently shifted the corporate excise tax assessment system from a three-factor apportionment based on sales, payroll, and property to one based solely on sales. This change benefits companies with significant property and payroll in the state, removing penalties for investing or hiring in Massachusetts.
The type of business structure also influences the tax. Traditional corporations, manufacturers, securities corporations, and financial institutions are all subject to different tax rates and bases. For traditional corporations, the tax is typically 8% on income attributable to Massachusetts, plus $2.60 per $1,000 of taxable tangible personal property or net worth.
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Frequently asked questions
For the 2024 tax year, Massachusetts has a 5% tax on earned and unearned income over $8,000. An additional 4% tax is levied on income over $1 million, making the highest tax rate in the state 9%.
Some of the recent changes to Massachusetts tax laws include:
- An increase in the rental deduction from $3,000 to $4,000.
- An increase in the child tax credit from $180 to $310 for 2023, and $440 beginning in 2024.
- A change in the corporate excise tax assessment, which is now based solely on sales.
- An increase in the threshold for a taxable estate from $1,000,000 to $2,000,000 for decedents dying on or after January 1, 2023.
You can file your Massachusetts income tax returns through the secure online portal, MassTaxConnect. You can also view your payment history and interact directly with the Massachusetts Department of Revenue through this portal.
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