FY99H1A Tax Expenditures Part II

Fiscal Affairs Division

The Tax Expenditure Budget

Part II: The Personal Income Tax

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, 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.

The personal income tax is the state's largest revenue source, accounting for 56% of taxes collected in Fiscal Year 1997.

Personal Income Tax: Basic Structure

Tax Base: The personal income 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 was 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 ("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 endnote 3 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, is 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.

Computation of the Personal Income Tax

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 Generally 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 (AGI): 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: Generally, all income from the same source is taxed at the same rate. 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.

List of Personal Income Tax Expenditures


1.000	EXCLUSIONS FROM GROSS INCOME

1.001	Exemption of Premiums on Accident and Accidental Death Insurance¹
	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 з 106 Estimate: $1.5

1.002	Exemption of Premiums on Group-Term Life Insurance¹
	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 з 79 Estimate: $13.6

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 з 101 Estimate: $254.9

1.004	Exemption of Employer Contributions for Medical Insurance Premiums and Medical Care¹
	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 зз 105 and 106 Estimate: $448.8

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 Plans²
	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, зз 2(a)(2)(E) and 3B(a)(4) Estimate: $6.4

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, з 2(a)(2)(H) Estimate: $4.6

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: $93.6

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, з 2 (a)(2)(H) Estimate: $506.8

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 з 104 (a)(1) Estimate: $4.2

1.011	Exemption for Dependent Care Expenses¹
	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 з 129 Estimate: $10.1

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 з 131 Estimate: $3.9

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 з 104(a)(1) Estimate: N.A.

1.014	Exemption of Rental Value of Parsonages¹
	A minister may exclude from gross income a rental allowance or the rental value of a parsonage furnished to him or her. Origin: IRC з 107 Estimate: $0.6

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 з 117 Estimate: $10.4

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 з 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 з 126 Estimate: N.A.

1.018	Exemption of Meals and Lodging Provided at Work¹
	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 з 119 Estimate: $5.3

1.019	Treatment of Business-Related Entertainment Expenses¹
	With certain limitations, a business may take a deduction of up to 80% of the cost of business-related entertainment expenses, consistent with federal rules in 1988. 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. Since 1988, federal rules regarding entertainment expenses have changed. Origin: IRC з 162 Estimate:. $5.0

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, з 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 з 121 Estimate: $40.6

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 зз 1001 and 1014 Estimate: $77.4

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, з 2 (a)(1)(A) Estimate: $115.2

1.024	Exemption of Benefits and Allowances to Armed Forces Personnel¹
	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 зз 112-113 Estimate: $5.0

1.025	Exemption of Veterans' Pensions, Disability Compensation and G.I. Benefits
	These veterans' benefits are not taxed. Origin: 38 U.S.C. з 5301 Estimate: $13.5

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 з 104(a)(4) Estimate: $0.3

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. з 574; M.G.L. c. 62, з 5A(c) Estimate: $7.4

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. Origin: M.G.L. c. 62, з 25 Estimate: N.A.

1.029	Exemption for Retirement Pay of the Uniformed Services
	Effective January 1, 1997, income received from the United States government as retirement pay and survivorship benefits for a retired member of the Uniformed Services of the United States is exempt from the personal income tax. The Uniformed Services of the United States are: the Army, Navy, Air Force, Marine Corps, Coast Guard, and the Commissioned Corps of the Public Health Service and National Oceanic and Atmospheric Administration. Origin: M.G.L. c. 62, з 2 Estimate: $18.0

1.100	DEFERRALS OF GROSS INCOME

1.101	Net Exemption of Employer Contributions and Earnings of Private Pension Plans²
	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 зз 401-415 in effect January 1, 1985 and M.G.L. c. 62 зз 2(a)(2)(F) and 5(b) Estimate: $579.5

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 cannot be determined. Origin: IRC зз 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, з 5(b) Estimate: N.A.

1.104	Exemption of Earnings on IRA and Keogh Plans²
	Massachusetts taxes contributions made by individuals 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, зз 2(a)(2)(F) and 5(b) Estimate: N.A.

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 з 1034 Estimate: $30.5

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 зз 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.) is eligible for a 50% deduction from the 12% capital gains tax. Origin: M.G.L. c. 62, з 2(c)(3) Estimate: N.A.

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. The carryover provisions create a tax expenditure. Origin: M.G.L. c. 62, з 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 зз 613 and 613A in effect January 1, 1985 Estimate: $1.4

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, з 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 з 168(b) Estimate: $4.9

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 з 167(k) Estimate: N.A.

1.303	Accelerated Depreciation on Buildings (Other Than Rental Housing)
	Individuals or investors in a trade or business 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 зз 167(j) and 168(b) Estimate: $6.3

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 з 168 Estimate: $45.6

1.305	Deduction for Excess First-Year Depreciation
	Individuals or investors in a trade or business 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 з 179 Estimate: $1.7

1.306	Five-Year Amortization of Business Start-Up Costs
	Individuals or investors in a trade or business 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 з 195 Estimate: $0.8

1.307	Five-Year Amortization of Certain Operating Rights
	Individuals or investors in a trade or business 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, з 243 Estimate: N.A.

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 зз 263(c), 616 and 617 in effect January 1, 1985 Estimate: $0.3

1.309	Expensing Research and Development Expenditures in One Year
	Individuals or investors in a trade or business 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 з 174 Estimate: $0.6

1.310	Five-Year Amortization of Pollution Control Facilities
	Individuals or investors in a trade or business 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 з 169 Estimate: N.A.

1.311	Seven-Year Amortization for Reforestation
	Individuals or investors in the forestry business 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 з 194 Estimate: N.A.

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 зз 175, 180 and 182 and Reg. зз 1.61-4, 1.162-12 and 1.471-6 Estimate: $0.2

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, з 3B(a)(3) Estimate: $276.1

1.402	Deduction for Employee Contributions to Public Pension Plans²
	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, з 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, зз 3B(b)(1)(C) and (2)(C) Estimate: $12.9

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, зз 3B(b)(1)(B) and (2)(B) Estimate: $0.8

1.405	Dependents Exemption Where the Child Earns Income³
	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 endnote 3. Origin: IRC з 151(c) in effect January 1, 1988 and M.G.L. c. 62 з 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 $1,200 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, з 3B(a)(8) Estimate: $31.8

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 з 151(c) in effect January 1, 1988 and M.G.L. c. 62 з 3B(b)(3) Estimate: $5.5

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, з 3B(b)(5) Estimate: $0.7

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 з 21, in effect January 1, 1988 and M.G.L. c. 62, з 3B(a)(7) Estimate: $15.4

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 з 213 and M.G.L. c. 62, з 3B(b)(4) Estimate: $24.3

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, з 3B(a)(9) Estimate: $91.5

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, зз 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, з 3B(a)(6) Estimate: $10.5

1.414	Tuition Tax Deduction
	A deduction is allowed for tuition payments to a two or four year college in which a taxpayer or taxpayerТs dependent is enrolled. The deduction is equal to the amount by which the tuition payment, less any scholarships, grants or financial aid received, exceeds 25% of the taxpayer's Massachusetts adjusted gross income, exclusive of this deduction. Origin: M.G.L. c. 62, з 3B(a)(11) 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, з 2(b)(1)(A) Estimate: $87.3

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 was limited to 25% of the cost of a renewable energy source up to a maximum of $1,000. After 1990 the credit was further limited to 15% with the same $1,000 cap. Origin: M.G.L. c. 62, з 6(d) Estimate: N.A.

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 $1,500. A five-year carryover of any unused credit is provided. Origin: M.G.L. c. 62, з 6(e) Estimate: $ 5.8

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, з 6(g) Estimate: N.A.

1.604	Credit for Employing Former Full-Employment Program Participants
	Employers who continue to employ former participants of the з110(1) full employment program in non-subsidized positions are eligible to receive a tax credit equal to $100 per month for each month of non-subsidized employment, up to a maximum of $1,200 per employee, per year. Origin: St. 1995, c. 5, з 110(m) Estimate: N.A.

1.605	Earned Income Credit
	Effective January 1, 1997, taxpayers will be allowed a refundable credit against Massachusetts tax equal to 10% of the amount of the earned income credit claimed on their federal individual income tax return. Origin: M.G.L. c. 62, з 6(h) Estimate: $30.0

1.606	Septic System Repair Credit
	Taxpayers required to repair or replace a failed cesspool or septic system pursuant to the provisions of Title V, as promulgated by the Department of Environmental Protection in 1995, are allowed a credit equal to 40% of the design and construction costs incurred (less any subsidy or grant from the Commonwealth), up to a maximum of $1,500 per tax year and $6,000 in total. Unused credits can be carried forward for up to three years. Origin: M.G.L. c. 62, з 6(i) Estimate: $18.0

PROPOSED HOUSE 1A CHANGES

$5,000 exemption for taxpayers who provide more than one-half of the support for elderly relatives over 70 years old and residing with the taxpayer for more than eight months.

Estimate: $4.0

Adopt federal capital gains exemption for the sale of a principal residence of $250,00 for single filers and $500,000 for joint filers.

Estrimate: $2.0

Provide a 5% personal income tax credit to taxpayers who invest in state-approved managed investment plans under the Massachusetts College Investment Savings Program.

Estimate: $2.6

Provide a personal income tax exemption of earnings and withdrawals from state-approved managed investment plans under the Massachusetts College Investment Savings Program.

Estimate: $0.4

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.

ENDNOTES:

¹ This item and others citing this endnote 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.

² This item and others citing this endnote cover contributory pension plans. The standard tax treatment of these plans is 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 Pension Funds:	Tax-free to the extent they are made out of dollars previously taxed to the 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.

³ Estimates for the basic personal exemptions and the no tax status discussed in the introduction to te personal income tax are:

Personal exemption for single taxpayers: $133.4

Personal exemption for married couples: $304.0

Personal exemption for married taxpayers filing separately: $7.2

Personal exemption for heads of households: $38.6

Dependents exemption: $98.5

No tax status/Limited income credits: $127.1

Executive Office for Administration and Finance
Fiscal Affairs Division
State House, Room 272
Boston, MA 02133
(617) 727-2081

Last updated on January 21, 1998