Massachusetts vs. California: Key Tax Differences for Residents and Workers

Massachusetts and California have significantly different tax structures, impacting residents, workers, and businesses. Whether you’re considering a move or working remotely across state lines, understanding these differences is essential for financial planning and compliance.

While both states impose income, sales, and property taxes, the rates and rules vary considerably, affecting take-home pay, cost of living, and overall tax burdens.

Key Tax Categories in Each State

The key differences in tax policies between Massachusetts and California can be seen in income, sales, and property taxation. Each state has distinct rates, exemptions, and rules that affect residents and workers.

Income Levies

Massachusetts applies a flat individual income tax rate of 5% as of 2024. A 4% surtax applies to annual income exceeding $1 million, bringing the effective rate to 9% for high earners. This surtax was enacted through the 2022 Fair Share Amendment, known as the “millionaire’s tax.”

California uses a progressive tax system with rates from 1% to 13.3%. The highest rate applies to taxable income exceeding $1 million for single filers and $2 million for joint filers. California also imposes a 7% Alternative Minimum Tax (AMT) on certain high-income taxpayers who claim significant deductions or credits.

Both states allow deductions for mortgage interest and student loan payments. However, Massachusetts limits many deductions compared to California, which follows federal guidelines more closely. California does not tax Social Security benefits, whereas Massachusetts does, aligning with federal taxation rules.

Sales Assessments

Massachusetts has a statewide sales tax of 6.25% with no local add-ons. It exempts most grocery items, prescription medications, and clothing under $175, with amounts exceeding this threshold subject to tax.

California’s base sales tax is 7.25%, but local jurisdictions can add levies, leading to total rates between 7.25% and 10.75%. Los Angeles County, for example, applies an additional 2.25%, bringing the total rate to 9.5%. California also taxes more services, including certain labor costs for repairs and installations.

Vehicle sales are taxed differently. Massachusetts applies a 6.25% sales tax on private auto transactions, while California taxes both new and used vehicle purchases, often with higher local rates increasing the total burden.

Property Evaluations

Massachusetts property tax rates, set by local governments, generally range from 1% to 2% of assessed value. Some cities, such as Boston, offer a Residential Exemption that reduces taxable value for owner-occupied homes. Assessments are updated annually, and tax bills are based on full market value.

California, under Proposition 13, caps property tax rates at 1% of assessed value, with annual increases limited to 2%. When a property is sold, it is reassessed at the new market price, often leading to higher taxes for new buyers. Certain transfers between family members may qualify for reassessment exclusions.

Massachusetts provides a circuit breaker tax credit for eligible senior homeowners and renters whose property taxes exceed a set percentage of their income. California offers a Property Tax Postponement Program, allowing certain seniors and disabled individuals to defer taxes under specific conditions.

Residency Criteria

Residency definitions determine tax obligations and differ between Massachusetts and California.

Massachusetts considers you a resident if your legal domicile is in the state or if you maintain a permanent home there and spend more than 183 days in a tax year. Domicile is based on factors such as where you live, vote, and hold a driver’s license. Even if you spend time outside Massachusetts, you may still be considered a resident if you have not established a new domicile elsewhere.

California uses a broader “closest connection” test, evaluating where you work, own property, claim tax exemptions, and conduct financial affairs. Unlike Massachusetts, California does not rely solely on the 183-day rule but assesses overall ties to the state.

For individuals splitting time between states, California’s aggressive residency enforcement can lead to tax disputes. The state has a “safe harbor” rule for those who leave under an employment contract for at least 546 consecutive days, preventing them from being classified as residents. However, this rule does not apply if they return to California for more than 45 days in a tax year. Massachusetts does not have a comparable safe harbor provision.

Allocating Income Between States

Massachusetts and California tax residents on worldwide income, while nonresidents are taxed only on income earned within the state.

Massachusetts taxes wages based on where work is performed. A nonresident working in Massachusetts for part of the year is taxed only on earnings tied to in-state workdays. California often taxes compensation for work performed outside the state if the employer is based in California or if the taxpayer has significant business ties there. This can result in remote workers owing California income tax even if they never physically enter the state.

Business income allocation follows different rules. Massachusetts uses a single-sales factor formula, taxing only revenue from in-state sales. California applies a market-based sourcing rule for service businesses, taxing income based on where the customer receives the benefit rather than where the service is performed.

Investment income, such as dividends, interest, and capital gains, is generally taxed based on residency. A Massachusetts resident with stock holdings in a California-based company pays Massachusetts tax on capital gains, while a California resident pays California tax on the same transaction. However, if a nonresident sells California real estate, the state requires withholding on the sale to ensure tax compliance.

Available Tax Credits

Massachusetts and California offer tax credits that reduce liability for individuals and businesses, though their structures differ.

Massachusetts provides an Earned Income Tax Credit (EITC) at 40% of the federal EITC as of 2024, benefiting lower-income workers. California’s version, the California Earned Income Tax Credit (CalEITC), phases out at lower income levels than the federal credit. California also offers a Young Child Tax Credit (YCTC) for families with children under six.

For homeowners, Massachusetts offers a Lead Paint Removal Credit, covering 30% of removal costs up to $1,500. California does not have a direct equivalent but provides a Solar Energy System Credit, complementing federal incentives for solar panel installation.

Businesses in Massachusetts may benefit from the Economic Development Incentive Program (EDIP) Credit, supporting job creation in designated economic areas. California offers the California Competes Tax Credit, awarded through a competitive process to businesses expanding within the state.

Withholding Requirements

Employers in Massachusetts and California follow different withholding rules, affecting paycheck deductions.

Massachusetts uses a flat withholding rate of 5%, with additional withholding for those subject to the 4% surtax on income over $1 million. Employees complete Form M-4 to adjust withholding allowances.

California’s system is more complex due to its progressive tax structure. Employers use withholding tables based on income brackets, with rates from 1% to 13.3%. Employees complete Form DE 4 to specify allowances, and additional withholding may apply for bonuses and stock compensation. California also requires withholding on certain non-wage payments, such as independent contractor earnings over $1,500 annually, unless the payee qualifies for an exemption.

Penalties for Inaccurate Returns

Filing errors or underpayment of taxes can result in penalties in both states, but enforcement differs.

Massachusetts imposes a late payment penalty of 1% per month on unpaid taxes, up to 25%, and a failure-to-file penalty of 1% per month, also capped at 25%. If underpayment results from negligence or intentional disregard of tax laws, an additional 20% penalty applies. Interest is charged on unpaid balances at the federal short-term rate plus 4%.

California enforces stricter penalties, particularly for underreporting income. The state imposes a 5% late filing penalty, plus 0.5% per month on unpaid taxes, up to 25%. Understating tax liability by more than $1,000 or 10% of the correct amount triggers an additional 20% penalty. Fraudulent returns carry a penalty of 75% of the underreported amount. California also aggressively pursues nonresidents who fail to report taxable income, often resulting in retroactive tax assessments and penalties.