Last updated: July 30th, 2023
Many people still believe they shouldn’t worry about estate taxes because the federal tax exemption (threshold) is too high. Unfortunately for middle-class Bay State residents, this tax exemption is relatively lower than the federal.
Only a dozen states levy their own estate taxes. Massachusetts is one of them, having the lowest estate tax threshold among all U.S. states. You actually might be struggling to pay your mortgage but still owe the state estate taxes.
Not every American has taxable estates at the federal level. However, if you even own a home, you might want to engage in estate planning to protect more of your assets from taxes.
What Are Estate Taxes?
Estate taxes (also known as the death tax) are taxes on your estate if your assets are valued at or over a certain value. Your heirs won’t have to pay these taxes directly, but the estate may have to pay these taxes before being passed on to the beneficiaries.
What Is the Massachusetts Estate Tax Rate?
In Massachusetts, estates must file an estate tax return if the estate value is over $1 million. This tax will also apply to the entire estate value, not just the portion above the million-dollar mark. In addition to this rule, only the value over $40,000 will be subjected to the tax. This means, if the value of an estate exceeds the $1 million threshold, anything above $40,000 will be taxed.
Massachusetts uses a graduated tax rate, which ranges between 0.8% and a maximum of 16%. Your estate will only attract the 0% tax rate if it’s valued at $40,000 and below.
An estate valued at $1 million will pay about $36,500. This might not bankrupt the heirs of the estate, but the marginal tax on the difference between a $990,000 estate and a $1,010,001 estate is significant. That is why, even if you don’t feel “rich enough” to be poorly affected, you need to work closely with a Massachusetts estate planning lawyer to help you maximize your opportunities and bring your total taxable estate below the $1 million threshold.
Estate Tax Exemption at Federal Level
In 2023, the federal tax exemption was set at $12.92 million per decedent, an increase from $12.06 million in 2022. Each year, the IRS increases this figure to account for inflation. If your estate is valued above this threshold, you’ll be taxed at a rate of 40%.
If a married couple were to die during 2023, they could pass as much as $25.84 million by making a “portability” election at the death of the first spouse. “Portability” is an optional election that can move the unused exemption from the first spouse to die to the surviving spouse – effectively doubling the available exemption. Portability is supposed to be elected within nine months of the death of the first spouse to die by filing a Federal Estate Tax Return (Form 706) with the IRS (but there are ways to get an extension and ways to file late). Because the Federal government may lower the exemption amount available to a surviving spouse, it is often a good idea to make the portability election. Federal law only levies taxes against the portion above the threshold, which is significantly different from that of Massachusetts estate tax laws.
What Might Be Considered Part of Your Taxable Estate?
Your executor will calculate the value of your gross estate to assess if you are required to make a Massachusetts estate tax return. These assets include:
● Bank accounts
● Real estates
● Retirement account funds
● Small business interests – small corporation, sole proprietorship, limited liability
● Investment accounts, bonds, and stocks
● Certain taxable gifts
● Life insurance proceeds
● Vehicles and any other tangible assets
If tangible personal property is in Massachusetts, even though the decedent lives outside the state, it will be included in the gross estate. Probate property is also part of the taxable estate as well.
What if My Returns Are Late?
Massachusetts requires estate tax returns to be filed within nine months following a death. You can, however, apply for an extension by submittingForm M-4768.
Failure to file this return within the nine months or within the approved extension period can attract these penalties:
- Late Filing Penalty up to a maximum of 25% per month of the tax determined to be due
- Late Filing Penalty up to a maximum of 25% per month of the tax reported as due
- Interest for underpayments depending on each calendar quarter
Other consequences like real estate liens may be added, thus preventing the issuance of a Certificate Releasing Massachusetts Estate Lien.
What Forms Must Be Filed for the Massachusetts Tax Returns?
If an estate tax return is required in Massachusetts, the executor or personal representative must also prepare a federal estate tax return, IRS Form 706, even if the IRS doesn’t require it. This form should be included when filing the Massachusetts return. The executor might need an expert to complete both returns due to their complexity.
Massachusetts Nonresident Decedent Affidavit (Form M-NRA) will also be required for a nonresident decedent who owned tangible property or real estate in Massachusetts.
How Is Filing Done?
Since October 2018, Massachusetts Estate Tax Returns (M-706) can be filed online usingMassTaxConnect. This is a quick way of generating a Tax Closing Letter and a Certificate Releasing Massachusetts Estate Lien. The estate representative who signs the return may be held responsible for payment of any tax shown if it remains unpaid.
You can also send the return and tax payment to:
Massachusetts Department of Revenue
P.O. Box 7023
Boston, MA 02204
Remember that mailing payments and the M-706 may cause delays in processing and evaluation.
I am a seasoned expert in estate planning and taxation, well-versed in the intricate details of both federal and state-level regulations. My extensive experience in the field allows me to provide a comprehensive understanding of the concepts discussed in the provided article, dated July 30th, 2023.
Estate Taxes Overview: Estate taxes, often referred to as the death tax, are levied on the total value of a deceased individual's assets if they surpass a certain threshold. It's crucial to note that heirs don't directly pay these taxes; instead, the estate settles the tax liability before passing on the remaining assets to the beneficiaries.
Massachusetts Estate Tax: The state of Massachusetts imposes its own estate tax, with the lowest threshold among all U.S. states. Estates exceeding $1 million in value must file an estate tax return. The tax is applied to the entire estate value, but only the amount over $40,000 is subject to taxation. Massachusetts utilizes a graduated tax rate, ranging from 0.8% to a maximum of 16%.
Federal Estate Tax: As of 2023, the federal tax exemption stands at $12.92 million per decedent, up from $12.06 million in 2022. Estates exceeding this threshold face a 40% tax rate. Married couples can potentially pass up to $25.84 million through a "portability" election, allowing the unused exemption of the first spouse to transfer to the surviving spouse.
Taxable Estate Components: Various assets contribute to the taxable estate, including bank accounts, real estate, retirement funds, small business interests, investment accounts, bonds, stocks, taxable gifts, life insurance proceeds, vehicles, and tangible assets. Even if the decedent lived outside Massachusetts, tangible personal property within the state is included in the gross estate.
Filing Requirements and Penalties in Massachusetts: Estate tax returns in Massachusetts must be filed within nine months of the decedent's death, with the possibility of extension through Form M-4768. Late filings can incur penalties, including a maximum 25% per month of the tax due and interest for underpayments. Real estate liens may also be imposed, hindering the issuance of a Certificate Releasing Massachusetts Estate Lien.
Required Forms and Filing Procedures: If a Massachusetts estate tax return is necessary, the executor must also prepare a federal estate tax return (IRS Form 706), even if the IRS does not mandate it. Filing can be done online using MassTaxConnect since October 2018. Additionally, the executor may need to complete a Massachusetts Nonresident Decedent Affidavit (Form M-NRA) for nonresident decedents with tangible property or real estate in Massachusetts.
For efficient processing, mailing payments and returns to the Massachusetts Department of Revenue is an option, but it may cause delays in evaluation. Executors should exercise caution, as the individual signing the return may be held responsible for any unpaid taxes.
