Massachusetts Inheritance Tax: What You Need To Understand

Understanding the intricacies of an inheritance tax is important for anyone dealing with the passing of a loved one. In this blog post, we’ll break down what you need to know about inheritance taxes in Massachusetts, dispel some common misconceptions, and provide strategies to help you minimize your tax liability. 

What is an inheritance tax? 

An inheritance tax is a financial obligation placed on those who receive assets or property from the estate of a deceased person. The amount of this tax depends on the value of the inherited assets. Unlike estate taxes, which are settled by the estate before distribution, inheritance taxes are the responsibility of the beneficiaries.

In the United States, the inheritance tax varies by state. It applies to the portion of the inheritance that exceeds a certain threshold. However, the tax rates can vary based on the relationship between the person who has passed away and their beneficiaries. For example, immediate family members often receive preferential tax treatment compared to distant relatives or unrelated individuals.

Inheritance Tax vs. Estate Tax

A common misconception about this type of tax is that it is the same as estate tax. However, these are distinct taxes with different rules and applications. Estate tax is applied to the entire value of the estate before any assets are distributed to heirs. In contrast, the payment of an inheritance tax rests on the shoulders of the beneficiaries, and it’s calculated based on the portion of the estate they receive. 

Another misunderstanding is that all states impose inheritance tax, but this is not the case. Only a few states have such a tax, and the regulations can be quite different in one state compared to another.

Does Massachusetts have an inheritance tax?

In Massachusetts, beneficiaries receiving assets from an estate are not subject to inheritance tax, meaning they won’t owe taxes on their inherited portion. However, Massachusetts does enforce an estate tax, which impacts the estate as a whole before assets are distributed to the heirs. This estate tax must be considered as it can influence how much each beneficiary ultimately receives.

When compared to most states, Massachusetts is typical in that it does not impose an inheritance tax. However, there are a few states that do have inheritance taxes, including New Jersey, Maryland, Pennsylvania, Kentucky, Iowa, and Nebraska.¹

These states have unique tax structures with both inheritance and estate taxes. This distinction can influence estate planning strategies for individuals with ties to multiple states, especially when considering the tax implications for beneficiaries.

Please Note: Iowa is gradually eliminating its inheritance tax following its repeal in 2021. During the transition period from 2021 to 2024, certain beneficiaries will still be required to pay a diminished inheritance tax on estates.¹

Do I have to pay taxes on a house I inherited in Massachusetts? 

Inheriting a house in Massachusetts comes with several tax considerations. Understanding these implications is important because they will help you make well-thought-out choices that are compliant with state and federal legislation. If you’re inheriting property in Massachusetts, be sure to consider the following:

Tax implications of inheriting real estate in Massachusetts: When you inherit real estate in Massachusetts, you are not required to pay inheritance tax because the state does not impose one. However, the value of the inherited property may be subject to the state’s estate tax if the overall estate exceeds certain thresholds.

Capital gains tax on inherited property: When you sell inherited property, you might have to pay capital gains tax. The amount subject to tax is based on the property’s fair market value when the original owner passes away, rather than its original purchase price. This adjustment, known as the ‘step-up in basis,’ can considerably lower the capital gains tax owed if the property’s value has increased since it was originally purchased.²

Steps to take when inheriting a house: After inheriting a house, it’s important to get an accurate appraisal to establish its fair market value. This valuation will be important for tax purposes, including capital gains and potential estate tax calculations. Additionally, you may be required to file an estate tax return if the total value of the estate exceeds the Massachusetts estate tax exemption threshold. Seeking advice from a tax professional can provide valuable guidance through this process.

Are there estate taxes in Massachusetts?

Yes, Massachusetts imposes an estate tax on the transfer of assets from a deceased person’s estate to their beneficiaries. This tax applies to estates that exceed the state’s exemption threshold, making it essential for residents to understand the rules and adjust accordingly.

Overview of Massachusetts estate tax laws: Massachusetts imposes estate taxes on estates that exceed a value of $2 million, covering assets such as real estate, investments, personal belongings, and life insurance benefits.³ Unlike the federal estate tax, which applies to significantly larger estates due to its higher exemption limit, the lower threshold in Massachusetts means that a greater number of estates fall under state tax regulations. 

Estate tax thresholds and rates in Massachusetts: The tax rates for Massachusetts estates range from 0.8% to 16%, depending on the value of the estate.³ It’s important to note that the tax is not just levied on the amount above the exemption. For instance, if an estate is valued at $2.7 million, the tax would not be only levied on the $700,000. Additionally, the state provides a credit of $99,600.³

Process of calculating and filing estate taxes in Massachusetts: To determine the estate tax owed, executors must first calculate the total value of the estate. This involves appraising all assets and subtracting any debts or liabilities. Once the taxable estate is established, the applicable tax rate is applied. Executors are then required to file an estate tax return with the Department of Revenue within nine months of the date of death. Extensions can be requested if more time is needed to complete the filing.

Please Note: The estate tax exemption on the federal level for 2024 is $13.61 million. However, this is soon set to change. The amount will go back down to only $5 million (with adjustments for inflation) at the start of 2026.⁴

Strategies to lower your estate tax liability

Minimizing estate tax liability requires proactive planning and strategic use of various financial tools. Here are some effective strategies to consider:

Gifting strategies and annual exclusion limits: Reducing estate taxes can be achieved through strategic gifting. For 2024, the annual limit allows individuals to give $18,000 per person without facing gift tax consequences.⁵ By regularly distributing gifts, you can effectively reduce the size of your estate over time, thereby potentially lowering the state estate taxes that your heirs will have to pay after you pass away.

Setting up trusts to minimize estate taxes: Trusts are powerful tools in estate planning. A common approach is to set up an irrevocable trust, which removes assets from your taxable estate. By transferring ownership to the trust, these assets are no longer part of your estate, thus reducing the overall taxable amount. These trusts may include, but are not limited to, grantor-retained annuity trusts (GRATs), charitable remainder trusts (CRTs), and irrevocable life insurance trusts (ILITs). 

Charitable donations and their impact on estate taxes: Charitable giving can also help reduce estate taxes. Donations made to qualified charities are deductible from the gross estate, lowering the taxable estate’s value. This not only benefits your chosen charities but also provides a means to lessen the estate’s tax burden. 

Other estate planning tools and techniques: There are various other strategies to consider, such as family limited partnerships (FLPs), which can help transfer wealth to heirs while maintaining control over the assets. Additionally, making direct payments for medical expenses and education costs is another effective strategy. Payments made directly to medical providers or educational institutions on behalf of someone else are not subject to gift tax and can reduce the size of your taxable estate. 

Let us help with your Massachusetts tax planning 

At Berkshire Money Management, we know that the complexities of estate and inheritance taxes can feel overwhelming. That’s why our financial advisory team is here to help you through every step of the process, keeping your estate planning both effective and efficient.

Our experts will work with you to develop a comprehensive tax strategy that aligns with your financial goals. From understanding the implications of the federal estate tax to leveraging the various gifting strategies available to you, we cover all aspects to minimize what you have to pay Uncle Sam.

Every individual’s financial situation is unique, which is why we offer personalized estate planning services. Whether you need assistance with setting up trusts, making strategic gifts, or handling real estate transactions, our team provides tailored solutions. We can help your estate plan protect your wishes and maximize the benefits for your heirs.

Estate planning is an ongoing process. It requires regular review and adjustments to adapt to changing tax laws and personal circumstances. Our team offers continuous support and expert advice, ensuring you’re always up-to-date on how new regulations may affect your estate. Schedule a free 15-minute, zero-commitment phone call and start shaping the legacy you wish to leave behind!

Citations:

1. https://www.nolo.com/legal-encyclopedia/state-inheritance-taxes.html
2. https://www.investopedia.com/terms/s/stepupinbasis.asp
3. https://www.mass.gov/info-details/massachusetts-estate-tax-guide
4. https://www.investopedia.com/estate-tax-exemption-2021-definition-5114715
5. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024