In October 2023, the Commonwealth of Massachusetts passed revisions to the state tax code to make Massachusetts more competitive with other states, and to provide fairness and tax relief to its citizens.
*Story updated January 2024 to include the 2023 SEPTIC CREDIT FORM (SCHEDULE SC) here.
Being somewhat cynical when I hear about any government actually reducing taxes, I was expecting some bogus reforms, but that’s not what this tax reform bill actually contains. It’s real, actual tax relief, and will benefit just about everyone except for married couples with an income over $1,000,000, where a real loophole, which appears to have been created by mistake, was closed. This previous loophole allowed people to legally avoid the ‘millionaires tax’ surcharge of 4% on income over a million dollars**.
One particular part of these changes, which can be a huge boon to people selling their homes in Massachusetts, is a significant increase in the septic credit for people who need to do septic work prior to listing their home for sale. A passing Title 5 Inspection is required any time you sell or transfer a home in Massachusetts, and it’s also required if you change your home’s footprint, or add a bedroom. *Pictured above is our own Mount Flushmore septic field, a favorite spot for the dogs to play.
The seller of the home pays for the inspection (I’ve seen inspection costs anywhere from $800 – $2,000 depending on a variety of factors). If your septic system fails, it means your system doesn’t meet the requirements for a septic system in Massachusetts, and it must be remediated, either by repairing or replacing the existing system. Both can be quite expensive.
There are only a few exceptions to having to pass Title 5 when a property is transferred: top of mind for me–selling a home with a septic system that is less than 2 years old, selling to an immediate family member, and selling to a cash buyer who takes on the responsibility for the system. This last option sounds easier than going through the design and installation process, but cash buyers are typically investors and they will not want to pay retail price for a home with a failed septic system, so you’d probably be leaving money on the table if you sell your house with a failed septic to an investor. But I digress.
This new law, recognizing how expensive making repairs to a septic system can be, changes the amounts and percent which can be deducted as tax credits from your state income tax. Prior to this change, the maximum that could be deducted was $6,000 (credits are spread out over a period of years). This has been tripled to $18,000. The percent of eligible expenses that can be deducted goes to 60% from 40%, and the amount that can be deducted on state taxes, per year, goes from $1,500 to $4,000. If you can deduct the full $18,000 for instance, you could deduct $4,000 from your tax bill over four years, and then probably the last $2,000 in year five; but as usual, I’m not a tax advisor, so talk with your accountant about things like this.
And remember–A tax deduction just lets you reduce your income, while a tax credit is a dollar to dollar reduction in your actual tax bill. This can really mitigate the sting of the significant costs to update or replace your septic system.
On the down side, also note that if you are selling because you are moving out of state, to say Florida, a credit on your Massachusetts state income taxes won’t do you much good after year one, since you wouldn’t be filing state taxes in Massachusetts. Of course if you had moved to Florida, you wouldn’t be filing them there either, since they have no state income tax.
This is also a reason why the state estate tax calculation was changed dramatically….if you have an estate valued at over a million dollars, you were far better off selling it and moving to Florida, where there are no estate taxes, and if your estate here in Massachusetts was over a million, even if by only $1, the whole estate was taxable. That really wasn’t fair and was plenty counterproductive, which is why that was also changed in the new law. It makes it less of a necessity to get out of Massachusetts to preserve estates.
This tax reform bill also lowered short term capital gains tax rates.
**The change to the millionaires tax, which was voter approved and doesn’t impact most of us in the slightest anyway, closed an interesting loophole which I’m sure wasn’t anticipated. The change is to disallow couples who earned over a million dollars, from filing taxes separately, if they filed jointly for federal taxes. What the previous situation allowed for was that a couple (two people) who earned a million dollars jointly, could simply file separately in Massachusetts, meaning that instead of filing jointly and reporting an income of $1,000,000, and consequently owing $40,000 extra, they’d just file as each earning half a million (or any other combination), and owe $0 for the millionaires tax.
Of course, even this change doesn’t mean “the millionaires’ tax” will be a windfall for Massachusetts. It might just result in more taxes paid to the federal government, as more people file separately rather than jointly on their federal tax returns. It also might result in high earners moving out of state, or simply not realizing income that would put them at $1,000,000. It’s tough to have a tax system that is fair, equitable, provides enough income to the state, but doesn’t turn out to be counterproductive. This tax bill was a definite step in the right direction.
If you’ve replaced your septic system, talk with your CPA about how to cushion the financial blow by taking best advantage of the increase in state tax credits.
Here’s some additional sources of information regarding this improved septic credit:
2023 SEPTIC CREDIT FORM (SCHEDULE SC)
EPA: Funding for Septic Systems
“Septic Systems: The Act includes updates to the credit for expenditures for the design and construction for the repair or replacement of a failed cesspool or septic system. The credit has been increased to 60% of the federal credit (previously 40%). Taxpayer expenditures up to $30,000 can qualify (previously limited to $15,000). The credit will be allowed beginning in the tax year when the repair or replacement of the system is completed. The credit allowed in a single tax year has increased from $1,500 to $4,000, and any excess credit can be carried forward five subsequent tax years, up to an aggregate maximum of $18,000 (60% of the $30,000 maximum for expenditures). Massachusetts’ credit now requires compliance with the State Environmental Code in addition to any federal requirements.” —© Verrill 2023 | Attorney Advertising