Part II: The Personal Income Tax Fiscal Year 1996

The Tax Expenditure Budget

Although income from professions, trades or employment was taxed throughout the nineteenth
century under the local property tax, it was not until 1916, under the authority of Article 44 of the
Amendments to the Massachusetts Constitution, that the Massachusetts personal income tax was
enacted as a separate tax. Unlike most states with income taxes, Massachusetts applies flat rather
than graduated rates, because Article 44 requires that all income of the same class be taxed at the
same rate.

Generally, starting in 1988, the Massachusetts personal income tax ties into the federal Internal
Revenue Code as it was on January 1, 1988. Federal amendments made after that date have not been
adopted by Massachusetts. To the extent that the Massachusetts tax takes federal law as its starting
point, it adopts many federal tax expenditures.

This tax is the state's largest revenue source, accounting for 53.6% of taxes collected in Fiscal Year
1994. Personal income tax collections for Fiscal Year 1996 are expected to be about $6.4 billion.

Personal Income Tax: Basic Structure

Tax Base: The tax base is gross income minus the costs of producing the gross income (trade or
business expenses). Massachusetts gross income is defined as federal gross income with certain
modifications. Effective January 1, 1996 it will be divided into three classes: interest, dividends, and
short-term capital gains ("Part A" income); long-term term capital gains (╥Part C╙ income); and all
other income (or "Part B" income). Massachusetts taxpayers are entitled to a basic personal
exemption which varies according to taxpayer status. The exempted amounts are considered to be
outside the generally accepted tax base. They reflect the notion that income needed for bare
subsistence should be free from tax. Thus, for the purposes of this document, these exemptions are
not listed as tax expenditures. In addition, taxpayers whose income is below a specified level are
entitled to "no tax status". For the same reason, this status is not listed as a tax expenditure. On the
other hand, because policy makers are often interested in the effects of adjusting the dollar amounts
for the personal exemptions and the no tax status, estimates are provided for them in footnote 4 to
item 1.405 in the list of personal income tax expenditures.

Taxable Unit: Individuals are taxed separately, with the exception of married couples, who may file
a joint return. The income of children is not aggregated with that of their parents. The income of
trusts, estates and corporate trusts, including partnerships and associations with transferable shares, is
also subject to the personal income tax.

Rate Structure: The rate of tax on Part B "earned" taxable income is 5.95%. The rate on Part A
"unearned" income is 12%. The differential between "earned" and "unearned" income has its roots in
the historical origin of the personal income tax. When the personal income tax was adopted, the
property and economic activities whose income was subjected to the new statewide tax were
simultaneously exempted from the local property tax in order to avoid double taxation. The rates
originally established for these classes of income were apparently intended to approximate the
previous statewide average burdens of local property taxes on the related properties and activities.
Therefore, in this document, this differential rate feature will be treated as part of the basic structure
of the tax.

Effective January 1, 1996, Part C income, long-term capital gains, will be subject to the following
tax rates based on how long the assets are held:

Holding Period Tax Rate

up to a year 12%
more than one, but less than two years 5%
more than two, but less than three years 4%
more than three, but less than four years 3%
more than four, but less than five years 2%
more than five, but less than six years 1%
more than six years 0%

Assets acquired prior to January 1, 1996 will be deemed to have been acquired on the later of
January 1, 1995 or the actual date of acquisition.

Taxable Period: The taxable period is one year (or less), usually the calendar year. Income may be
reported according to the cash or accrual method. Where property is sold on a deferred payment
basis, gains may be reported in the years the payments are received. There is no Massachusetts
provision for income averaging. Net capital losses may be carried forward to future years.

Interstate and International Aspects: Residents are taxed upon their entire income, whether
derived from Massachusetts sources or elsewhere, without allocation or apportionment. Nonresidents
are taxed only on income from sources within Massachusetts. A resident may take a limited credit
against the Massachusetts income tax for income taxes due to other states, the District of Columbia,
any territory or possession of the United States, or Canada or its provinces on any item of
Massachusetts gross income.

Types of Tax Expenditures under the Personal Income Tax

The basic structure of the personal income tax can be modified in a number of different ways to
produce tax expenditures. Brief explanations of the various types of tax expenditures follow:

Exclusions from Gross Income: Gross income is the starting point in the calculation of income
tax liability and, in the absence of tax expenditures, would include all income received from all
sources. Items of income that are excluded from gross income typically are not reported by the
taxpayer on his or her tax return, and they escape taxation permanently.

Deferrals of Gross Income: Where an item of income is not included in gross income in the year
when it is actually received, but is instead included in a later year, the result is a tax expenditure in the
form of an interest-free loan from the state to the taxpayer in the amount of the tax payment that
is postponed.

Deductions from Gross Income: Certain amounts are subtracted from gross income to arrive at
adjusted gross income (AGI). Many of these deducted amounts reflect the costs of producing income
(business expenses), and are not properly part of the income tax base. Such deductions are not tax
expenditures. Other deductions which do not reflect business expenses constitute tax expenditures,
which permit corresponding amounts of income to escape taxation permanently.

Accelerated Deductions from Gross Income: In a number of cases, taxpayers are allowed to
deduct business expenses from gross income at a time earlier than such expenses would ordinarily be
recognized under accepted accounting principles. The total amount of the permissible deduction is
not increased, but it can be utilized more quickly to reduce taxable income. The result is to defer
taxes, thus in effect occasioning an interest-free loan from the state to the taxpayer.

Deductions from Adjusted Gross Income: Taxable income results from the subtraction of
certain deductions and exemptions from AGI. Certain of these subtracted items represent amounts of
income necessary for subsistence; their exclusion is part of the basic structure of the income tax.
Other subtracted items represent tax expenditures, which permit corresponding amounts of income
to escape taxation permanently.

Preferential Rates of Taxation: Ordinarily, all "earned" income is taxed at one rate and all
"unearned" income at another. When an item of income is taxed at a rate below the rate ordinarily
applied to that class of income, a tax expenditure results. The result is equivalent to excluding a
portion of the income from taxation.

Credits Against Tax: After a taxpayer's basic tax liability has been calculated by applying the tax
rates to taxable income, the taxpayer may subtract certain credit amounts from this initial liability in
determining the actual amount of taxes that must be paid. It is important to note that, whereas a
one dollar exclusion or deduction results in a tax savings of only a few cents (one dollar times the
applicable tax rate), a one dollar credit results in a one dollar tax savings.

Personal Income Tax List of Tax Expenditures

1.000 EXCLUSIONS FROM GROSS INCOME

1.001 Exemption of Premiums on Accident and Accidental Death Insurance2
Employer contributions for premiums on accident and accidental death insurance
are not included in the income of the employee and are deductible by the employer.

Origin: IRC д 106
Estimate: $ 0.9

1.002 Exemption of Premiums on Group-Term Life Insurance2
Employer payments of employee group-term life insurance premiums for coverage
up to $50,000 per employee are not included in income by the employee and are
deductible by the employer.

Origin: IRC д 79
Estimate: $ 19.0

1.003 Exemption of Interest on Life Insurance Policy and Annuity Cash Value
Interest which is credited annually on the cash value of a life insurance policy or
annuity contract is not included in the income of the policy holder or annuitant.
Only when a life insurance policy is surrendered before death or when annuity
payments commence does the interest become subject to tax. (Interest on dividends
left on deposit is taxable.)

Origin: IRC д 101
Estimate: $ 104.2

2 This item and others citing this footnote cover employee fringe benefits. We accept as standard the following
treatment of these benefits: the expense incurred by the employer in providing the benefit is properly deductible as a
business expense and the benefit is taxed as compensation to the employee as if the employee had received taxable
compensation and then used it to purchase the benefit. Of course, there are problems with this analysis. In some
cases, the "benefit" is more a condition of employment than a true benefit. For example, a teacher required to have
lunch in the school cafeteria may prefer to eat elsewhere even if the school lunch is free. On the other hand, in many
cases the provision of tax-free employee benefits is clearly a substitution for taxable compensation.

1.004 Exemption of Employer Contributions for Medical Insurance Premiums and
Medical Care2
Employer contributions for medical insurance premiums and reimbursements for
medical care are not included in the income of the employee and are deductible by
the employer.

Origin: IRC дд 105 and 106
Estimate: $ 466.0

1.005 Exemption of Annuity or Pension Payments to Fire and Police Personnel
Income from noncontributory annuities or pensions to certain retired fire and
police personnel or their survivors is tax-exempt.

Origin: M.G.L. c. 32
Estimate: N.A.

1.006 Exemption of Distributions from Certain Contributory Pension and Annuity
Plans3
Certain pensions and annuity distributions are tax-exempt under Massachusetts law.
They are payments from contributory plans of the U.S. government,
Massachusetts and its subdivisions, and other states which do not tax such income
from Massachusetts. The nontaxation of the benefits in excess of contributions
taxed by Massachusetts is a tax expenditure.

Origin: M.G.L. c. 62, дд 2(a)(2)(E) and 3B(a)(4)
Estimate: N.A.

1.007 Exemption of Railroad Retirement Benefits
Railroad retirement benefits are not taxed. (Massachusetts has not adopted
Internal Revenue Code section 86, which taxes some of these benefits if a
taxpayer's income is above a certain level.)

Comment: No adjustment is made for any prior payments taxpayers may have
made to fund this system since employee payments to this system are taxes rather
than contributions.
Origin: M.G.L. c. 62, д 2(a)(2)(H)
Estimate: $ 3.3

3. This item and others citing this footnote cover contributory pension plans. The standard tax treatment of these
plans
as follows:
Component Standard Treatment
Contributions: Made out of income which is currently taxed to the employee.
Investment Income: Taxed to the employee as "earned" income.
Distributions from Tax-free to the extent they are made out of dollars previously taxed to the
Pension Funds: employee as contributions or investment income.
The non-standard treatment of contributions, investment income, or distributions as described in items 1.006, 1.101,
1.104, and 1.402, results in either nontaxation or deferrals of tax.

1.008 Exemption of Public Assistance Benefits
Public assistance or welfare benefits are not taxed. These include Aid to Families
with Dependent Children (AFDC), Supplemental Security Income (SSI) benefits,
and the like.

Origin: Rev. Rul. 71-425, 1971-2 C.B. 76
Estimate: $ 26.4

1.009 Exemption of Social Security Benefits
Social Security benefits paid to persons age 65 or older and their dependents, to
persons under 65 who are survivors of deceased workers, and to disabled workers
and their dependents are not taxed. (Massachusetts has not adopted Internal
Revenue Code section 86, which taxes a portion of these payments where a
taxpayer's income is above a certain level.)

Comment: The comment under item 1.007 applies to this item as well.
Origin: M.G.L. c. 62, д 2 (a)(2)(H)
Estimate: $ 296.7

1.010 Exemption of Workers' Compensation Benefits
Workers' compensation benefits are not taxed. These are benefits paid to disabled
employees or their survivors for employment-related injuries or diseases.

Origin: IRC д 104 (a)(1)
Estimate: $ 3.3

1.011 Exemption of Dependent Care Expenses2
Day care paid for or provided by an employer to an employee that does not exceed
the employee's or employee's spouse's "earned" income, and does not exceed the
amount of $5,000, is not included in the income of the employee and is deductible
by the employer.

Origin: IRC д 129
Estimate: $6.1

1.012 Exemption of Certain Foster Care Payments

Qualified foster care payments are not includible in the income of a foster parent.

Comment: The exclusion from income for foster care payments has been
expanded in Massachusetts to include payments for foster care individuals age 19 or
over.
Origin: IRC д 131
Estimate: $ 4.2

1.013 Exemption of Payments Made to Coal Miners
Coal miners or their survivors may exclude from income payments for disability or
death from black lung disease.

Origin: IRC д 104(a)(1)
Estimate: negligible

1.014 Exemption of Rental Value of Parsonages2
A minister may exclude from gross income a rental allowance or the rental value of
a parsonage furnished to him or her.

Origin: IRC д 107
Estimate: N.A.

1.015 Exemption of Scholarships and Fellowships
Degree candidates can exclude scholarships and fellowship income if the amounts
are not compensation for services or for the payment of room, board or travel
expenses.

Origin: IRC д 117
Estimate: $ 8.1

1.016 Exemption of Certain Prizes and Awards
Prizes and awards are generally required to be included in income. The exemption
of certain prizes and awards is generally limited to taxpayers who donate the
proceeds to a charitable organization. Certain employee achievement awards are
also excluded from gross income.

Origin: IRC д 74
Estimate: N.A.

1.017 Exemption of Cost-Sharing Payments
Portions of government cost-sharing payments to assist in water and soil
conservation projects are not includible in the recipient's income.

Origin: IRC д 126
Estimate: negligible

1.018 Exemption of Meals and Lodging Provided at Work2
The value of meals and lodging furnished to the employee by the employer on the
business premises for the employer's convenience is not included in the income of
the employee. The employer's expenses are deductible.

Origin: IRC д 119
Estimate: $ 3.8

1.019 Treatment of Business-Related Entertainment Expenses2
With certain limitations, a business may take a deduction of up to 80% of the cost
of business-related entertainment expenses. Generally, the value of the
entertainment is not taxed as income to the persons who benefit from the
expenditures. The effect is to provide the hosts and their guests with a nontaxable
fringe benefit.

Origin: IRC д 162
Estimate: $ 3.1

1.020 Exemption of Income from the Sale, Lease or Transfer of Certain Patents
Income from the sale, lease or other transfer of approved patents for energy
conservation, and income from property subject to such patents, are excluded from
gross income for a period of five years.

Origin: M.G.L. c. 62, д 2(a)(2)(G)
Estimate: N.A.

1.021 Exemption of Capital Gains on Home Sales for Persons 55 and Over
Taxpayers age 55 and over may exclude from income $125,000 of capital gain on
the sale of a principal residence. This exemption may be taken only once.

Origin: IRC д 121
Estimate: $ 39.4

1.022 Nontaxation of Capital Gains at Death
Ordinarily, capital gains are taxed at the time appreciated property is transferred.
However, no tax is imposed on a capital gain when appreciated property is
transferred at death. The appreciation that accrued during the lifetime of the
transferor is never taxed as income.

Comment: The estimate also covers item 1.106 below.
Origin: IRC дд 1001 and 1014
Estimate: $ 65.1

1.023 Exemption of Interest from Massachusetts Obligations
Interest earned on Massachusetts bonds is exempt. The exclusion applies to bonds
of Massachusetts agencies and local subdivisions as well.

Origin: M.G.L. c. 62, д 2 (a)(1)(A)
Estimate: $ 82.5

1.024 Exemption of Benefits and Allowances to Armed Forces Personnel2
Armed forces personnel can exclude from income mustering out payments and
compensation for service in a combat zone. They and specified other U.S.
government employees may exclude certain allowances and in-kind benefits.

Origin: IRC дд 112-113
Estimate: $ 4.9

1.025 Exemption of Veterans' Pensions, Disability Compensation and G.I. Benefits
These veterans' benefits are not taxed.

Origin: 38 U.S.C. д 5301
Estimate: $ 15.0

1.026 Exemption of Military Disability Pensions
Disability pensions paid to service personnel are fully excluded from gross income.
The portion of a regular pension that is paid on the basis of disability may also be
excluded.

Origin: IRC д 104(a)(4)
Estimate: $ 0.4

1.027 Exemption of Compensation to Massachusetts-Based Nonresident Military
Personnel
Compensation paid by the U.S. to nonresident uniformed military personnel on
duty at bases within Massachusetts for services rendered while on active duty is
defined as compensation from sources outside Massachusetts. It is therefore not
taxed.

Comment: This tax treatment follows U.S. statutory law.
Origin: 50 U.S.C. App. д 574; M.G.L. c. 62, д 5A(c)
Estimate: $ 13.2

1.028 Exemption for Taxpayers Killed in Military Action or by Terrorist Activity
Massachusetts residents who die in combat while in active military service, or who
die as a result of terrorist or military action outside of the U.S. while serving as
military or civilian employees of the U.S. are exempt from income taxation.

Comment: This provision is retroactive to calendar year 1987.
Origin: M.G.L. c. 62, д 25
Estimate: negligible

1.100 DEFERRALS OF GROSS INCOME

1.101 Net Exemption of Employer Contributions and Earnings of Private Pension Plans3
Employer contributions to private, qualified employee pension plans are deductible
by the employer up to certain amounts and are not included in the income of the
employees. Income earned by the invested funds is not currently taxable to the
employees. Benefits in excess of any employee contributions previously taxed by
Massachusetts are taxable when paid out. The value of the tax deferral on
contributions and on the investment income is a tax expenditure.

Origin: IRC дд 401-415 in effect January 1, 1985 and M.G.L. c. 62 дд 2(a)(2)(F)
and 5(b)
Estimate: $ 472.3

1.102 Treatment of Incentive Stock Options
Massachusetts has adopted the federal rules for employee stock options. Generally,
employers may offer employees options to purchase at a later date company stock
at a price equal to the fair market value of the stock when the option was granted.
At the time employees exercise the option, they do not include in income the
difference between the fair market value and the price they pay. If they later sell
the stock, they are taxed on the

amount by which the price they receive for the stock exceeds the price they paid.
Thus, income is deferred and is taxed as a capital gain instead of as compensation.
However, the employer gets no business deduction from granting the option, and
the effective tax rates on capital gains and "earned" income differ only slightly in
Massachusetts. Therefore, the revenue effect is negligible.

Origin: IRC дд 421-425
Estimate: N.A.

1.103 Exemption of Earnings on Stock Bonus Plans or Profit Sharing Trusts
Investment income earned by stock bonus plans or profit sharing trusts is not taxed
currently to employees.

Origin: M.G.L. c. 62, д 5(b)
Estimate: N.A.

1.104 Exemption of Earnings on IRA and Keogh Plans3
Massachusetts taxes contributions of employees or the self-employed to private
pension plans. However, income earned on the contributed funds is not taxed
currently. Upon retirement, payments in excess of contributions are taxed. The
deferral of tax on the investment income is a tax expenditure.

Origin: M.G.L. c. 62, дд 2(a)(2)(F) and 5(b)
Estimate: $ 180.4

1.105 Deferral of Capital Gains on Home Sales
Where the sale of a taxpayer's principal residence is preceded or followed within a
two-year period by the purchase of a new residence, gain is recognized only to the
extent that the sale price of the old residence exceeds the purchase price of the new
one. The taxpayer's "basis" (i.e. the purchase price, as adjusted for purposes of
computing capital gain upon sale) in the new home is adjusted to reflect the
unrecognized gain. Thus, the gain is deferred until the taxpayer sells a home under
circumstances that do not qualify for deferral.

Origin: IRC д 1034
Estimate: $ 60.2

1.106 Nontaxation of Capital Gains at the Time of Gift
Ordinarily, capital gains are taxed at the time appreciated property is transferred.
However, no tax is imposed on a capital gain when

appreciated property is transferred by gift. The taxation of appreciation is
deferred until the recipient transfers the property.

Origin: IRC дд 1001, 1015
Estimate: Included in item 1.022

1.200 DEDUCTIONS FROM GROSS INCOME

1.201 Capital Gains Deduction
Taxpayers are allowed to deduct 50% of net capital gains in computing "unearned"
income. The result of the deduction is to tax net capital gains at an effective rate
of 6%.

Comment: Effective January 1, 1996, only long-term capital gains realized from
the sale of collectibles (as defined by sec. 408 (m) of the I.R.C.) will be eligible for a
50% deduction from the 12% capital gains tax.
Origin: M.G.L. c. 62, д 2(c)(3) and IRC д 1221 and others
Estimate: $ 82.5

1.202 Deduction of Capital Losses Against Interest and Dividend Income
Taxpayers may deduct up to $1,000 of net capital loss against interest and dividend
income, which is taxed as "unearned" income. Any excess net capital loss may be
carried forward to succeeding years and applied to such income, up to $1,000 per
year, to the extent there is no net capital gain for the year. Net capital losses are
carried over to succeeding years, where they can be used to offset any capital gains.
Normally, losses can only be used to offset income in the year of the loss. The
carryover provisions create a tax expenditure.

Origin: M.G.L. c. 62, д 2(c)(2)
Estimate: N.A.

1.203 Excess Natural Resource Depletion Allowance

Individuals (or investors) in extractive industries (mining or drilling natural
resources) may deduct a percentage of gross mining income as a depletion
allowance. The allowance may exceed the actual cost of the resource property.
For a more detailed description of this tax expenditure, see corporate excise item
2.204.

Origin: IRC дд 613 and 613A in effect January 1, 1985
Estimate: $ 1.6

1.204 Abandoned Building Renovation Deduction
Businesses renovating eligible buildings in Economic Opportunity Areas may deduct
10% of the cost of renovation from gross income. This deduction may be in
addition to any other deduction for which the cost of renovation may qualify. To
be eligible for this deduction, renovation costs must relate to buildings designated as
abandoned by the Economic Assistance Coordinating Council.

Origin: M.G.L. c. 62, д 3(B)(a)(10)
Estimate: N.A.

1.300 ACCELERATED DEDUCTIONS FROM GROSS INCOME

1.301 Accelerated Depreciation on Rental Housing
Landlords and investors in rental housing may use accelerated methods of
depreciation for new and used rental housing. Rental housing placed in service after
1988 is depreciated on a straight-line basis over a 27.5-year period. Rental housing
placed in service before 1988 was depreciable over shorter periods (generally 19 or
20 years), and, instead of straight-line depreciation, the 175% declining balance
method was permitted. Straight-line depreciation over the property's expected
useful life is the generally accepted method for recovering the cost of building
structures. The excess of allowable depreciation over such generally accepted
depreciation is a tax expenditure, resulting in a deferral of tax or an interest-free
loan.

Origin: IRC д 168(b)
Estimate: $ 4.6

1.302 Accelerated Depreciation for Rehabilitation of Low-Income Housing
Landlords and other investors in low-income housing may amortize rehabilitation
expenditures initiated before 1987 over a five-year period. For a more detailed
description of this tax expenditure, see corporate excise item 2.302.

Origin: IRC д 167(k)
Estimate: negligible

1.303 Accelerated Depreciation on Buildings (Other Than Rental Housing)
Individuals in a trade or business (or investors) may use accelerated methods of
depreciation for buildings. Construction may be depreciated under methods which
produce faster depreciation than economic depreciation. The precise rates have
been changed repeatedly in recent years as the result of revisions in the federal tax
code. Structures (other

than rental housing) placed in service after 1987 are depreciated on a straight-line
basis over a 31.5-year life. The excess of accelerated depreciation over economic
depreciation is a tax expenditure.

Origin: IRC дд 167(j) and 168(b)
Estimate: $ 1.0

1.304 Accelerated Cost Recovery System (ACRS) for Equipment
For depreciable tangible personal property placed in service after 1980, capital
costs must be recovered using the Accelerated Cost Recovery System (ACRS) which
applies accelerated methods of depreciation over set recovery periods. For
property placed in service after 1987, Massachusetts has adopted the Modified
Accelerated Cost Recovery System (MACRS), which generally uses double declining
balance depreciation over specified periods that are substantially shorter than actual
useful lives (200% declining balance for 3-, 5-, 7- and 10-year recovery property
and 150% declining balance for 15- and 20-year property). The excess of
accelerated depreciation over what is considered to be normal depreciation for
tangible personal property (double declining balance) is a tax expenditure.

Origin: IRC д 168
Estimate: $ 25.1

1.305 Deduction for Excess First-Year Depreciation
Individuals in a trade or business (or investors) may elect to expense certain
business assets purchased during the taxable year up to a maximum amount of
$10,000. Any remaining cost must be depreciated according to MACRS, as
described in the preceding item. The immediate deduction results in a deferral of
tax or an interest-free loan.

Origin: IRC д 179
Estimate: $ 0.6

1.306 Five-Year Amortization of Business Start-Up Costs
Individuals in a trade or business (or investors) may elect to treat business start-up
expenditures as deferred expenses and amortize them over five years. For a more
detailed description of this tax expenditure, see corporate excise item 2.304.

Origin: IRC д 195
Estimate: $ 0.8

1.307 Five-Year Amortization of Certain Operating Rights
Individuals in a trade or business (or investors) may amortize over five years the
cost of bus route, freight forwarding and certain other operating rights that have
lost their economic value due to federal deregulation. For a more detailed
description of this tax expenditure, see corporate excise item 2.310.

Origin: Tax Reform Act of 1986, д 243
Estimate: negligible

1.308 Expensing Exploration and Development Costs
Individuals (or investors) in extractive industries (mining or drilling natural
resources) may take an immediate deduction for certain exploration and
development costs. For a more detailed description of this tax expenditure, see
corporate excise item 2.309; the provisions for individual taxpayers are somewhat
more liberal than those that apply to corporations.

Origin: IRC дд 263(c), 616 and 617 in effect January 1, 1985
Estimate: $ 0.8

1.309 Expensing Research and Development Expenditures in One Year
Individuals in a trade or business (or investors) may take an immediate deduction
for research and development expenditures. For a more detailed description of this
tax expenditure, see corporate excise item 2.308.

Origin: IRC д 174
Estimate: $ 1.3

1.310 Five-Year Amortization of Pollution Control Facilities
Individuals in a trade or business (or investors) may elect to amortize the cost of a
certified pollution control facility over a five-year period. For a more detailed
description of this tax expenditure, see corporate excise item 2.311.

Origin: IRC д 169
Estimate: N.A.

1.311 Seven-Year Amortization for Reforestation
Individuals in the forestry business (or investors) may amortize the costs of
reforestation over a seven-year period. For a more detailed description of this tax
expenditure, see corporate excise item 2.313.

Origin: IRC д 194
Estimate: negligible

1.312 Expensing Certain Capital Outlays of Farmers
Farmers may use certain favorable accounting rules. For instance, they may use the
cash basis method of accounting and may deduct up to 50% of non-paid farming
expenses as current expenses even though these expenditures are for inventories on
hand at the end of the year. They also may deduct certain capital outlays, such as
expenses for fertilizers and soil and water conservation if they are consistent with a
federal- or state-approved plan. Generally, these special rules are not available to
farming corporations and syndicates.

Origin: IRC дд 175, 180 and 182 and Reg. дд 1.61-4, 1.162-12 and 1.471-6
Estimate: $ 0.3

1.400 DEDUCTIONS FROM ADJUSTED GROSS INCOME

1.401 Deduction for Employee Social Security and Railroad Retirement Payments
Taxes paid by employees to fund the Social Security and Railroad Retirement
systems are deductible against "earned" income up to a maximum of $2,000 per
individual.

Comment: The estimate also covers item 1.402 below.
Origin: M.G.L. c. 62, д 3B(a)(3)
Estimate: $ 264.0

1.402 Deduction for Employee Contributions to Public Pension Plans3
Employee contributions to federal and state contributory pension plans are
deductible against "earned" income up to a maximum of $2,000 per individual.

Origin: M.G.L. c. 62, д 3B(a)(4)
Estimate: Included in item 1.401

1.403 Additional Exemption for the Elderly
A taxpayer age 65 or over is entitled to an additional exemption against "earned"
income of $700 ($1,400 for a married couple filing jointly if both spouses are age
65 or over).

Origin: M.G.L. c. 62, дд 3B(b)(1)(C) and (2)(C)
Estimate: $ 11.0

1.404 Additional Exemption for the Blind
A blind taxpayer is allowed an additional exemption against "earned" income of
$2,200 ($4,400 for a married couple filing jointly if both spouses are blind).

Origin: M.G.L. c. 62, дд 3B(b)(1)(B) and (2)(B)
Estimate: $ 0.5

1.405 Dependents Exemption Where the Child Earns Income4
Taxpayers are allowed an additional exemption of $1,000 for a dependent child
even when the child earns income against which a $2,200 personal exemption can
be taken.

Comment: The estimate cannot be separated from the figure for the dependents
exemption in footnote 4.
Origin: IRC д 151(c) in effect January 1, 1988 and M.G.L. c. 62 д 3B(b)(3)
Estimate: N.A.

1.406 Deduction for Dependents under 12
Individual taxpayers and married taxpayers filing jointly with one or more
dependents under age 12 may deduct $600 against "earned" income if they do not
claim the deduction for child care described in item 1.409 below.

Origin: M.G.L. c. 62, д 3B(a)(8)
Estimate: $ 14.0

1.407 Personal Exemption for Students Age 19 or Over
A taxpayer may claim a dependent exemption of $1,000 for a child who is a full-
time student even if he or she is 19 or over.

Origin: IRC д 151(c) in effect January 1, 1988 and M.G.L. c. 62 д 3B(b)(3)
Estimate: $ 6.0

4 Estimates for the basic personal exemptions and the no tax status discussed in the introduction to the personal
income tax are:
Personal exemption for single taxpayers: $112.0
Personal exemption for married couples: $279.0
Personal exemption for married taxpayers filing separately: $6.0
Dependents exemption: $83.0
Personal exception for heads of households: $12.7
No tax status/Limited income credits :$141.1

1.408 Deduction for Adoption Fees
Adoption fees paid to a registered adoption agency are deductible against "earned"
income to the extent they exceed 3% of adjusted gross "earned" income.

Origin: M.G.L. c. 62, д 3B(b)(5)
Estimate: $ 1.0

1.409 Deduction for Business-Related Child Care Expenses
Taxpayers qualifying for the credit for employment-related child care expenses in
the Internal Revenue Code are allowed a deduction against "earned" income for the
amount of the expenses which qualify for the credit.

Comment: For federal tax purposes, the requirement that employment-related
child care expenses relate only to children under age 15 was further restricted to
children under age 13. In addition, a federal change now requires a taxpayer to
include employer-provided dependent care expenses when calculating the limitation
amount of qualifying expenses.
Origin: IRC д 21, in effect January 1, 1988 and M.G.L. c. 62, д 3B(a)(7)
Estimate: $ 15.0

1.410 Exemption of Medical Expenses
Medical and dental expenses in excess of 7.5% of federal adjusted gross income are
deductible against "earned" income for taxpayers who itemize on their federal
returns.

Origin: IRC д 213 and M.G.L. c. 62, д 3B(b)(4)
Estimate: $ 27.4

1.411 Rent Deduction
Renters may deduct against "earned" income one-half of the rent paid for a
principal residence located in Massachusetts, up to a maximum of $2,500 per year.

Origin: M.G.L. c. 62, д 3B(a)(9)
Estimate: $ 92.0

1.412 Nontaxation of Charitable Purpose Income of Trustees, Executors or
Administrators
The adjusted gross income of trustees, executors or administrators which is
currently payable to or irrevocably set aside for public charitable purposes is tax-
exempt.

Origin: M.G.L. c. 62, дд 3A(a)(2) and B(a)(2)
Estimate: N.A.

1.413 Exemption of Interest on Savings in Massachusetts Banks
Up to $100 ($200 on a joint return) of interest from savings deposits or savings
accounts in Massachusetts banks is excluded from "earned" income.

Origin: M.G.L. c. 62, д 3B(a)(6)
Estimate: $ 13.0

1.500 PREFERENTIAL RATE OF TAXATION

1.501 Preferential Treatment of Interest on Savings in Massachusetts Banks
Interest paid on savings deposits in Massachusetts banks is taxed as "earned"
income while other interest income is taxed at the higher "unearned" income tax
rate. The difference is a tax expenditure.

Origin: M.G.L. c. 62, д 2(b)(1)(A)
Estimate: $ 169.6

1.600 CREDITS AGAINST TAX

1.601 Renewable Energy Source Credit
Owners and tenants of residential property located within Massachusetts who are
not dependents and who occupy the property as a principal residence are allowed a
credit up to $1,000, or an amount equal to 35% of the cost of a renewable energy
source.

Comment: The tax credit for taxable years commencing after December 31, 1988
and before January 1, 1991 is limited to 25% of the cost of a renewable energy
source up to a maximum of $1,000. After 1990 the credit will be further limited to
15% with the same $1,000 cap.
Origin: M.G.L. c. 62, д 6(d)
Estimate: negligible

1.602 Credit for Removal of Lead Paint
A tax credit is provided in the amount of the cost of removing or covering lead
paint on each residential unit up to $1,000. A five-year carryover of any unused
credit is provided.

Origin: M.G.L. c. 62, д 6(e)
Estimate: $ 7.7

1.603 Economic Opportunity Area Credit
Businesses investing in qualified property in an Economic Opportunity Area are
entitled to a credit against tax of 5% of the cost of the property. To qualify for
this credit, the property must be used exclusively in a certified project in an
Economic Opportunity Area. To be certified, a project must be approved by the
Economic Assistance Coordinating Council.

Origin: M.G.L. c. 62, д 6(g)
Estimate: N.A.

KEY: ORIGIN
IRC Federal Internal Revenue Code (26 U.S.C.)
U.S.C. United States Code
M.G.L. Massachusetts General Laws
Rev. Rul.; C.B. Revenue Ruling; Cumulative Bulletin of the U.S. Treasury
ESTIMATES
All estimates are in $ millions.