As you may know, the threshold for taxing estates in Massachusetts is $1 million, much less than the current $12.92 million threshold for federal estate taxes (in 2023). Fortunately, the rate is substantially less than the 40% federal tax rate, ranging from 0.8% to 16%. Here are the Massachusetts estate tax rates:
|Estate Size||Tax Rate|
|$40,001 – $90,000||0.8%|
|$90,001 – $140,000||1.6%|
|$140,001 – $240,000||2.4%|
|$240,001 – $440,000||3.2%|
|$440,001 – $640,000||4.0%|
|$640,001 – $840,000||4.8%|
|$840,001 – $1,040,000||5.6%|
|$1,040,001 – $1,540,000||6.4%|
|$1,540,001 – $2,040,000||7.2%|
|$2,040,001 – $2,540,000||8.0%|
|$2,540,000 – $3,040,000||8.8%|
|$3,040,001 – $3,540,000||9.6%|
|$3,540,001 – $4,040,000||10.4%|
|$4,040,001 – $5,040,000||11.2%|
|$5,040,001 – $6,040,000||12.0%|
|$6,040,001 – $7,040,000||12.8%|
|$7,040,001 – $8,040,000||13.6%|
|$8,040,001 – $9,040,000||14.4%|
|$9,040,001 – $10,040,000||15.2%|
As you can see, these rates start at $40,000, which makes it look like once an estate exceeds the $1 million threshold, it gets taxed back to the first $40,000. This is very confusing and, in fact, confused me for a long time. It’s an artefact of the linked Massachusetts and federal tax system that was in place before Congress eliminated tax credit for state estate taxes in 2005 on which the Massachusetts estate tax system was based. In consequence, Massachusetts revised its law to be equal to the federal estate tax credit in place in 1999. (Yes, that’s right, when preparing a Massachusetts estate tax return, you need to look at federal estate tax law in place more than two decades ago.) That credit is calculated using the above table, but it can be no larger than the federal estate tax back in 1999, when its threshold was also $1 million. So, in fact, the estate under $1 million is not taxed since back in 1999 the IRS did not tax the first $1 million. (This history and its effect are explained more fully here.)
From $1 million to $1,093,785, the 1999 federal estate tax is smaller than the credit for state estate tax, so between these figures the current Massachusetts estate tax equals what the federal estate tax would have been back then. (Attorney Vincent Lackner, who is the creator of both an estate tax return program for attorneys and Technical Consultant forf NumberCruncher, provided me with this figure.)
You may well ask why Massachusetts retains the rates below $1 million. First, that’s part of the calculation. Second, they come into play when the decedent had made taxable gifts, which we’ll explain below.
MA estate tax just above the $1 million threshold
The Massachusetts estate tax grows from about $400 on a $1,001,000 estate (after deductions), to $4,000 on a $1,010,000 estate, and $39,000 for a $1,100,000 estate. That won’t bankrupt the heirs, but the marginal tax on the difference between a $999,000 estate and a $1,100,000 estate is significant, effectively a 39% rate for that first $100,000 over the threshold, meaning that it behooves Massachusetts residents whose assets total just a bit above $1 million to get below that threshold before they die if they can take such a step at that time.
The marginal tax rate above $1.1 million settles down with the tax on a $1.2 million estate at $45,000 just $6,000 more than the tax on a $1.1 million estate.
So, what about making larger gifts to get below the $1 million threshold? Here’s where the interplay between Massachusetts and federal gift taxes gets interesting (at least for those of us who practice in this area; did anyone say anything about “nerds”?).
The Federal Gift Tax
While the federal system is set up to tax certain gifts, Massachusetts does not tax gifts at all. However, Massachusetts includes federally taxable gifts in determining whether the decedent’s estate exceeds the $1 million threshold. Confused? Here’s a longer explanation:
Many people have heard that gifts are limited to $15,000 per recipient per year. (Some people think it’s $10,000, which was the amount for a long time.) But that’s not true. The rule is that if you give anyone more than $15,000 in a year ($30,000 if you’re married, including both spouses’ gifts to the individual) then you are supposed to report the gift to the IRS. So, for instance, if you give your daughter $115,000 to help her with the downpayment on her house, you are supposed to report a taxable gift of $100,000. But you don’t have to pay a gift tax. That only occurs once all of your taxable gifts added together exceed the federal estate tax threshold of $11.58 million (in 2020). The other effect of this taxable gift is that it comes back in in determining the federal tax on your estate. Instead of being able to give away $11.58 million tax free at death, the gift uses up some of your estate tax credit, meaning that after helping your daughter with her house purchase you will be able to give away only $11.3 million tax free at death. And if you’re married, it reduces your combined credit from $22.8 million to $22.7 million.
Obviously, at these limits, the federal estate and gift taxes only affect a small number of the richest Americans. The $15,000 mentioned above is an exemption to the normal gift tax reporting rule. You don’t have to report gifts of up to $15,000 per recipient per year ($30,000 for a married couple). However, the reality is unless you have a very large estate, there will be no penalty even if you make gifts of more than $15,000 and don’t report them to the IRS. That said, they could come into play on your Massachusetts estate tax return.
The Massachusetts Estate Tax Threshold
While your gifts of more than $15,000 a year are probably irrelevant for federal tax purposes, they get added back into your estate for purposes of determining whether your Massachusetts estate exceeds the $1 million threshold and will be taxed. So, for instance, if your estate totals $850,000 but a year prior to your death you gave each of your two children $115,000 during the same year, your estate will be deemed to total $1,050,000 for purposes of determining whether it’s taxable—the $850,000 you have at death plus the $200,000 you made in taxable gifts to your children. In other words, because your estate plus your taxable gifts exceed $1 million, your estate will be subject to a Massachusetts estate tax, but only the $850,000 actually in the estate will be taxed.
Here’s another example of how this can work:
Jon Adams has $1.25 million. He gives $115,000 to each of his three children and then dies with an estate of $900,000. In preparing his estate tax return, the children must add back in their $300,000 in “taxable” gifts to determine whether he has a taxable estate. However, they need only pay taxes on the $900,000 remaining. So this saves some money in taxes, but not everything, reducing the tax from approximately $50,000 on a $1.2 million estate to approximately $28,000 on a $900,000 estate.
If, instead of making these large gifts to his children all at once, Jon had given them $15,000 each over several years to reduce his estate below $1 million, the gifts would not be added back in and his estate would not be subject to tax (saving both taxes and legal fees to prepare the estate tax return).
While the Massachusetts estate tax rate is significantly lower than the federal rate, it can often be reduced or avoided entirely through judicious and timely gifting.