Understanding the Basics of the Massachusetts Estate Tax

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 submitting Form 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 using MassTaxConnect. 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.