Tax Article - Massachusetts Capital Gains Update

Governor Mitt Romney has signed legislation canceling retroactive tax hikes on capital gains realized between January and May of 2002 and has authorized rebates of higher capital gains taxes paid between May and December of 2002. The Department of Revenue stopped issuing preliminary tax bills for 2002 capital gains as of December 2, 2005 in response to the state's Supreme Judicial Court decision that declared the effective date of the statute unconstitutional. About 21,000 of the 48,000 preliminary bills were mailed to taxpayers in recent weeks.

Originally, the Massachusetts Legislature increased the capital gains with an effective date of this increase on May 1, 2002, such that sales prior to that date were taxed at much lower rates or not taxed at all. However, a lawsuit ensued where a group of investors argued that the effective date of the new law was unconstitutional because it resulted in a mid-year change in tax rates. The state Supreme Judicial Court recently ruled the date of the statute is in fact unconstitutional -- leaving a choice to the legislature to either make the new law retroactive to January 1, 2002, or delaying it until January 1, 2003. It is estimated that making the change retroactive would increase revenue by $160 million while delaying the effective date will result in tax refunds of approximately $275 million. 

Taxpayers who have already paid the tax based on preliminary bills recently mailed will get automatic refunds. Taxpayers who will be due refunds for tax paid on gains realized in the last eight months of 2002 will have to apply for abatements to be paid out over the course of four years. The Department of Revenue has identified about 157,000 taxpayers who could receive refunds. Collectively the refunds will total about $250 million.

Please contact Feeley & Driscoll's Boston Accounting Firm by Email or call us at 1 (888) 875-9770.

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