Do I Have to Pay Taxes on Inheritance in Massachusetts?

While you will not pay taxes on assets you inherit in Massachusetts, you should understand the state’s estate tax. Massachusetts does not have an inheritance tax, which is a tax paid directly by a beneficiary on the assets they receive. Instead, the state imposes an estate tax on the total value of a person’s assets at death. This tax is paid by the estate itself before any property is distributed to the heirs, which can reduce the total amount of assets available for distribution.

The Massachusetts Estate Tax Explained

The Massachusetts estate tax is a levy on the total value of a decedent’s property. The executor or personal representative of the estate is responsible for paying this tax from the estate’s assets before any distributions are made to heirs. A Massachusetts estate tax return is required if the total value of the estate exceeds a specific threshold.

For individuals who passed away on or after January 1, 2023, an estate tax return must be filed if the “Massachusetts gross estate” is valued at more than $2 million. This exemption amount is an increase from the previous $1 million threshold and is not indexed for inflation. For a Massachusetts resident, the gross estate includes all property owned at death, regardless of location. For non-residents, the Massachusetts gross estate only includes real and tangible personal property located within Massachusetts.

Calculating the Massachusetts Taxable Estate

To determine if an estate owes taxes, the executor must first calculate the value of the “Massachusetts gross estate.” This figure includes property the decedent owned at death, such as:

• Real estate
• Bank accounts
• Investment portfolios including stocks and bonds
• Retirement accounts
• Vehicles
• Business interests
• The value of life insurance policies payable to the estate

Non-probate assets, such as property held in a revocable living trust, are also counted toward the gross estate for tax purposes.

Once the gross estate’s value is established, certain deductions are allowed to arrive at the “taxable estate.” These deductions include any debts the decedent owed, funeral expenses, and the administrative costs of settling the estate. Two other deductions can substantially reduce the taxable estate: the unlimited marital deduction for assets left to a surviving spouse, and the unlimited charitable deduction for bequests to qualified charitable organizations.

Determining the Estate Tax Amount

If the Massachusetts taxable estate exceeds the $2 million threshold, the tax is calculated using a progressive rate system. The tax is calculated using a graduated table, with rates that start at 7.2% and reach a maximum of 16%. The specific rate applied depends on the total value of the taxable estate.

A tax credit of $99,600 is applied, which effectively exempts the first $2 million from being taxed. This change, effective for deaths on or after January 1, 2023, eliminated the previous “cliff effect” where estates just over the threshold paid tax on the full amount. For example, for an estate with a taxable value of $2,100,000, the tax is calculated on the full amount, and the $99,600 credit is then subtracted to determine the final tax due.

Filing and Payment Responsibilities

The executor or personal representative of the estate is responsible for filing the estate tax return and paying any tax due. The required form is the Massachusetts Estate Tax Return, Form M-706, which can be filed electronically through the MassTaxConnect portal or mailed to the Massachusetts Department of Revenue. A pro forma federal Form 706, using the July 1999 version, must be completed and submitted with the Massachusetts return.

The deadline for filing Form M-706 and paying the estate tax is nine months after the decedent’s date of death. An extension of time to file or pay can be requested by submitting Form M-4768 before the original due date. The penalty for late filing or payment is 1% per month of the tax due, up to a maximum of 25%.

Upon a person’s death, an automatic estate tax lien is placed on all real estate they owned in Massachusetts, which must be released before the property can be sold with a clear title. The Department of Revenue now automatically issues a Certificate Releasing Massachusetts Estate Lien for each parcel of real estate listed on the Form M-706 once the tax is paid. If a property needs to be sold before the return is filed, the executor can apply for an early release of the lien using Form M-4422.

Tax Implications for Inherited Assets

While you do not pay an inheritance tax in Massachusetts, the assets you receive may have future tax consequences for you. For assets like real estate, stocks, and other investments, the concept of a “stepped-up basis” is applied. Under federal and Massachusetts law, the cost basis of an inherited asset is adjusted to its fair market value on the date of the original owner’s death. This means if you sell the inherited property, capital gains tax will be calculated on the difference between the sale price and the value at the time of death, which often reduces or eliminates the tax liability.

The tax treatment is different for inherited tax-deferred retirement accounts, such as a traditional IRA or 401(k), as their value is not stepped-up at death. When you, as the beneficiary, take distributions from these accounts, the money is taxed as ordinary income. Most non-spouse beneficiaries are required to withdraw the entire account balance within 10 years of the original owner’s death. Inherited Roth IRAs are an exception, as qualified distributions are tax-free since the original contributions were made with after-tax dollars.