What Is the 4% Surtax?
Starting with tax year 2023, personal income taxpayers must pay an additional 4% (4% surtax) on taxable income over $1,000,000, increased annually for inflation (surtax threshold). See M.G.L. c. 62, §§ 4(d) and 5A, as amended by §§ 28 and 29 of the FY24 Budget.
Massachusetts voters approved the 4% surtax on November 8, 2022, in an amendment to Article 44 of the Massachusetts Constitution.
Which Taxpayers Are Subject to the 4% Surtax?
The 4% surtax applies to all chapter 62 taxpayers, including individuals, trusts, estates, and unincorporated associations, that have taxable income exceeding the surtax threshold in a taxable year beginning with tax year 2023.
The 4% surtax applies to taxpayers who are required to file:
- Form 1 (residents),
- Form 1-NR/PY (nonresidents and part-year residents),
- Form 2 (trusts and estates),
- Form M-990T-62 (exempt trusts and unincorporated associations), or
- Form 3M (clubs and other organizations not engaged in business for profit).
See also the Special Rules for Nonresident Composite Filers FAQs.
Calculating Income Subject to the 4% Surtax
What income is subject to the 4% surtax?
Only the portion of a taxpayer’s taxable income that exceeds the surtax threshold for a tax year will be subject to the 4% surtax. For the 2023 tax year, the surtax threshold is $1,000,000. For the 2024 tax year, the threshold is $1,053,750.
How do I determine what portion of my taxable income is subject to the 4% surtax?
Once you determine your taxable income for a tax year, you subtract the amount of the surtax threshold for that year. For tax year 2023, the surtax threshold is $1,000,000. The difference between taxable income and the surtax threshold is the amount subject to the 4% surtax.
You must multiply the difference by 4% to determine the additional tax due and report that amount on your return.
How is taxable income calculated for purposes of determining the 4% surtax?
A taxpayer’s taxable income for determining the 4% surtax is the sum of a taxpayer’s Part A, Part B, and Part C taxable income for a tax year.
- Part A income consists of short-term capital gains, long-term gains on collectibles, and interest and dividends other than Massachusetts bank interest.
- Part B income consists of all other taxable income not included in Part A or Part C.
- Part C income consists of long-term capital gains.
In adding up the sum of Part A, Part B, and Part C, any Part that is negative is treated as 0. In other words, only Parts with positive taxable income amounts are added together.
You can find more information on income tax computation and the various parts of taxable income on the Department of Revenue (DOR) website.
Is a tax item from Part A, Part B, or Part C permitted to reduce taxable income in another part in calculating taxable income to determine the 4% surtax?
A tax item from Part A, Part B, or Part C can reduce taxable income in another part only to the same extent it is otherwise permitted under the relevant statute. For example, under chapter 62 of the M.G.L., excess Part B losses may be deducted against capital gains attributable to a taxpayer’s trade or business when determining Part A or Part C taxable income. However, once taxable income in each part is determined, a negative amount in one part cannot be used to reduce taxable income in another part when determining the 4% surtax.
Is any income excluded from taxable income when determining the application of the 4% surtax?
Where income is otherwise included in a taxpayer’s taxable income, it is included for purposes of determining the 4% surtax. Likewise, income that is otherwise excluded from a taxpayer’s taxable income is excluded when determining the 4% surtax. Income that is exempt from Massachusetts tax, such as interest on federal and Massachusetts obligations, is not included in the 4% surtax determination.
Is gain on the sale of a personal residence included in the calculation of taxable income when determining the application of the 4% surtax?
To the extent that income from the sale of a personal residence is otherwise subject to the personal income tax, it is also included in the calculation of annual taxable income when determining the 4% surtax. There is no exclusion from the 4% surtax for income from the sale of a personal residence that is otherwise included in annual taxable income.
Is income from an installment sale included in the calculation of taxable income when determining the application of the 4% surtax?
Income from installment sales is taken into account when determining the 4% surtax to the extent that it is included in Massachusetts income under the installment sale rules set out in M.G.L., c. 62, § 63.
Forms & Electronic Filing Requirements
How will I report the 4% surtax?
The return for tax year 2023 has been modified to allow taxpayers to include the 4% surtax in the calculation of total tax. See below for the line item specific to the different impacted tax forms.
- Form 1 (residents) – line 28b
- Form 1-NR/PY (nonresidents and part-year residents) – line 32b
- Form 2 (trusts and estates) – line 41b
- Form 990T-62 (exempt trusts and unincorporated associations) – line 29b
- Form 3M (clubs and other organizations not engaged in business for profit) – line 9b
- Nonresident taxpayers participating in a composite return must file a Form 1 – NR/PY if their annual taxable income exceeds the surtax threshold.
See also the Special Rules for Nonresident Composite Filers FAQs.
Is there a schedule that will help taxpayers calculate their taxable income subject to the 4% surtax?
Below is an image of the draft Schedule 4% Surtax. Taxpayers may use this schedule to determine their taxable income subject to the 4% surtax.
What are the electronic filing and payment requirements that apply to taxpayers subject to the 4% surtax?
All taxpayers subject to the 4% surtax must file their returns and make all payments electronically.
Special Rules for Nonresident Composite Filers
Can a nonresident individual report the 4% surtax on a composite return?
No. All nonresident taxpayers with taxable income exceeding the surtax threshold must file a Form 1-NR/PY to report the 4% surtax, even if the nonresident otherwise participates in a composite return.
A nonresident who owes the 4% surtax may participate in a composite return. However, that taxpayer must also file a Form 1-NR/PY.
What income must be reported on Form 1-NR/PY by a nonresident who participates in a composite return?
A nonresident taxpayer who participates in a composite return but is required to file a Form 1-NR/PY to report the 4% surtax must include all income from Massachusetts sources earned by the nonresident in the calculation of taxable income on such form. This includes the taxable income of the individual that is reported on the composite return.
How must payments made for a nonresident on a composite return be accounted for on that taxpayer’s Form 1-NR/PY?
A nonresident individual who must file a Form 1-NR/PY to report the 4% surtax must include that individual’s taxable income as accounted for on a composite return. As a result, any tax payments made for the nonresident with the composite return should be reflected on Form 1-NR/PY to reduce the nonresident’s total tax. A nonresident taxpayer must report such tax payment on Form 1-NR/PY, line 32c.
See examples of the application of the surtax for a nonresident taxpayer who participates in a composite return filed by a pass-through entity (PTE) for tax year 2023.
Elective Pass-Through Entity Excise
Can pass-through entities (PTEs) elect to pay a 9% PTE excise to take into account the 4% surtax?
No. The elective PTE excise is imposed at a statutory rate of 5%, which cannot be increased to account for the 4% surtax. See M.G.L. c 63D, § 2.
Withholding, Estimated Payments, Extensions & Penalties
How does the 4% surtax affect personal income tax withholding?
The 4% surtax must be taken into account when determining the required personal income tax withholding amount. New computational rules are included in Circular M for tax year 2024. The rules for withholding on wages, not including supplemental wage payments such as bonuses, are set out on page 12 of Circular M (Massachusetts Income Tax Withholding System / Percentage Methods for Wages (Not Including Supplemental Wage Payments) Paid).
How does the 4% surtax on personal income tax withholding apply to supplemental wage payments, such as bonuses?
The rules for withholding on supplemental payments, including bonuses, are set out on page 13 of Circular M (Massachusetts Income Tax Withholding System Percentage Methods for Pension, Annuity, Other Periodic Payments, Nonperiodic Payments (e.g., Lump-Sum Distributions), and Supplemental Wage Payments (e.g. Bonuses)). The method set out on page 13 seeks to ensure that 9% withholding is applied to supplemental wage payments that will be subject to the surtax. Note that this method applies regardless of whether the supplemental wage payment was made at the same time or separately from regular wages.
To determine the required withholding rate for supplemental wage payments one must first calculate the sum of (i) the supplemental wage payment (adjusted for exemptions as per Circular M), (ii) prior supplemental wage payments from the payor to the employee in the current tax year, and (iii) the employee’s total annualized regular wages from the payor for the current year.
If the sum is equal to or less than the surtax threshold, the required personal income tax withholding amount is 5% of the supplemental wage payment.
If the sum is greater than the surtax threshold, then the supplemental wage payment is subject to withholding in an amount equal to the lesser of: (i) 9% of the supplemental wage payment or (ii) 9% of the amount by which such sum exceeds the surtax threshold, plus 5% of the remainder of the supplemental wage payment.
Circular M provides detailed rules for withholding, including an example of the required computation for bonuses on page 13.
Early in 2024, DOR made multiple clarifying updates to the Circular M’s withholding rules for supplemental wage payments, including bonuses. DOR acknowledges that some employers making supplemental wage payments early in the 2024 calendar year may not have had sufficient time to reflect the updates in the tax withheld on those payments. In such cases, DOR expects to be lenient in its imposition of penalties for underpayment of withholding tax.
How does the 4% surtax impact estimated payments?
A taxpayer who reasonably expects to receive taxable income other than wages that will cause that taxpayer’s taxable income to exceed the surtax threshold must consider the 4% surtax when determining the required estimated tax for the taxable year. For example, if the taxpayer expects to have $700,000 in wages and $500,000 in income other than wages, the taxpayer reasonably expects to have $200,000 in taxable income that would exceed the surtax threshold and therefore be subject to the 4% surtax.
Is the 4% surtax taken into account when calculating the estimated tax underpayment penalty on form M-2210?
Yes. The starting point for determining the amount of a taxpayer’s estimated tax underpayment penalty is the amount of tax due for the year, which includes the 4% surtax.
Is the 4% surtax taken into account when determining whether a taxpayer has paid the required amount of tax to obtain an automatic extension of time to file a return?
Yes. Taxpayers must consider the 4% surtax when determining the total amount of tax due on or before the return's original due date to obtain an automatic extension of time to file the return. For example, personal income taxpayers must pay 80% of the tax due, including the 4% surtax, by April 16, 2024, to have a valid extension to file the tax year 2023 return.
Special Rules for Withholding & Estimated Tax Penalties for Tax Year 2023
DOR has issued guidance for withholding and estimated tax penalties that would otherwise apply to the payment of the 4% surtax for tax year 2023, the first year for which the surtax applied. This guidance, which applies in place of the general rules stated above, was intended to ease compliance in this first year.
For withholding tax returns and payments due by January 31, 2024, the 4% surtax is not considered when determining whether an employer withheld sufficient tax such that the employee would be subject to penalties or other consequences that could follow from the failure to withhold sufficient tax.
For 2023 estimated tax payments due by January 15, 2024, the 4% surtax will not be considered when determining whether there has been an underpayment of the estimated tax.
Other Jurisdiction Credit (OJC)
How does the 4% surtax impact Other Jurisdiction Credit calculation?
The Other Jurisdiction Credit is the lesser of:
- The amount of taxes due to other jurisdictions (net off certain adjustments) or
- The portion of the Massachusetts tax due on gross income that is taxed in another jurisdiction.
The 4% surtax will impact the credit calculation because, beginning with tax year 2023, taxpayers subject to the 4% surtax will have a higher amount of Massachusetts tax due on their gross income, as their total tax will include the 4% surtax. Instructions and applicable worksheets
Can I add the 4% surtax to the amount of Massachusetts tax paid on an item of income that is taxed to another jurisdiction when calculating the Other Jurisdiction Credit?
No. The 4% surtax only applies to taxable income over the surtax threshold. A taxpayer cannot assume that all the income that was taxed by another jurisdiction was included in the taxable income over the surtax threshold. Instructions and applicable worksheets
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