How MA Tax Reforms Might Affect High-Net-Worth Individuals Tax Webinars to be Hosted Next Week

Massachusetts lowered taxes for the first time in 20 years, but changes may not be compelling enough to anchor high-net-worth individuals who are looking to leave the state for a more favorable tax environment. While new legislation increases the estate tax exemption to $2,000,000, Massachusetts remains less competitive alongside the 13 other states that offer an exemption including Connecticut at $12,920,000, Maine at $6,410,000, New York at $6,580,000, and Vermont at $5,000,000. AAFCPAs and AAF Wealth Management would like to make clients aware of key components in the new law that could affect them.

The first reform of note is a provision that married couples filing joint federal tax returns must do the same on their state return. A tax strategy married couples have had at their disposal following the implementation of Massachusetts millionaire’s tax was to file separate Massachusetts returns as a means for reducing their tax obligation. The millionaire’s tax, passed into law on January 1, 2023, imposed a four percent surtax on any taxable income in excess of $1,000,000. By filing separately, a couple could use their $1,000,000 income threshold on a per person basis. Under the new rule, however, the same couple will be taxed on all income in excess of $1,000,000. Note this change does not take effect until the 2024 tax year.

No change has been made under the new law that will impact traditional Massachusetts trust planning. The amendment provides that estates of decedents passing away on or after January 1, 2023 are exempt from Massachusetts estate tax if the federal taxable estate is not more than $2,000,000. That said, for a married couple worth $4,000,000, were the husband to pass away and leave everything to his surviving spouse, his $2,000,000 exemption would not be used because the full inheritance would qualify for the marital deduction. As a result, the wife’s estate would still be worth $4,000,000 and she would be left with a single $2,000,000 exemption.

Clients need to implement particular trust planning to ensure their assets are held in such a way to take advantage of both spouse’s exemptions and to ensure they retain as much of their wealth as possible. In the above example, for instance, clients planning proactively would take advantage of each spouse’s $2,000,000 exemption and save almost $100,000 in Massachusetts estate tax.

In this new legislation, Massachusetts lawmakers have also introduced a single sales factor formula to overhaul the tax calculation on corporations conducting business in multiple states. Instead of looking at physical nexus, the state will look at a company’s overall sales. This is slated to replace the current apportionment system.

Among potential effects could be an outflux of high-net-worth individuals from Massachusetts to states with more tax-friendly jurisdictions. But it remains to be seen whether this is impetus enough for families to uproot. AAFCPAs and AAF Wealth Management can work with clients to minimize, and in some cases mitigate, estate tax by putting the right strategy in place while still ensuring clients have access and control over their wealth. We advise all clients talk with their tax and/or wealth management professional to ensure they plan proactively and accordingly in light of new legislation.

Year End Planning is Critical

As we near the close of another calendar year, we again encourage clients to assess their complete financial situation now in order to plan their year-end tax optimization strategy. As you do, be mindful that most tax reduction approaches must be implemented by December 31 or sooner. AAFCPAs is again hosting a series of year-end tax planning webinars next week to provide insights into various strategies to consider. Learn more.>>

If you have questions, please contact Joshua England, LLM, Esq., Partner & Tax Attorney at 774.512.4109 or—or your AAFCPAs Partner.

About the Author

Joshua England, Tax Attorney
Josh is a tax strategist with extensive expertise advising high-net-worth individuals, nonprofits, and business owners and investors on effective strategies to ensure tax efficiency, asset protection, well-executed succession plans, and wealth preservation. He has been practicing law since 2000 and focuses his practice on the areas of wealth transfer planning, fiduciary and individual taxation, business structuring to maximize tax efficiency, and advising tax-exempt organizations, foundations and charitable donors.