- General Rules and Qualifications
- Entity-Level Taxes Paid in Another State By a Pass-Through Entity
- Gross Receipts Based Taxes
- Mandatory Payments
- Nonresidents and Part-year Residents
- Where to Report on Original Tax Return; What to Enclose
- Documentation to Submit with Abatement/Amended Tax Return
- Massachusetts References
- Prior Law, History of Credit
Massachusetts residents and part-year residents are allowed a credit for taxes due to any other jurisdiction. The credit is available only on income reported and taxed on a Massachusetts return.
Note: Tax due is different from taxes withheld. The correct amount to use for this credit is the calculation of tax due, not tax withheld.
The Credit is allowed for taxes paid to:
- other states in the U.S.;
- any territory or dependency of the U.S., (including Puerto Rico, the Virgin Islands, Guam, the District of Columbia; and/or
- Canada or any of its provinces. The amount must first be reduced by an amount allowed as a federal Foreign Tax Credit on U.S. Form 1116. The allowable federal credit must be deducted whether or not claimed;
- New Hampshire for business profits tax which is considered an income tax
- District of Columbia Unincorporated Business Franchise Tax (UBT)
The credit is not allowed for:
- taxes paid to the U.S. government;
- taxes paid to a foreign country other than Canada or any of its provinces;
- any city or local tax;
- interest and penalties paid to another jurisdiction; and
- excise, property tax or franchise tax.
- for residents, the Schedule Z, Line 9 Worksheet - Income Tax Paid to Another Jurisdiction;
- part-year resident, the credit on Schedule F, Credit for Income Taxes Paid to Other Jurisdictions.
Nonresidents may not claim the taxes paid to other jurisdiction credit on their Massachusetts Form 1-NR/PY.
The computation is based on comparing the Massachusetts income tax on income reported to the other jurisdiction to the actual tax paid to the other jurisdiction; the credit is limited to the smaller of these two numbers.
Entity-Level Taxes Paid In Another State By A Pass-Through Entity:
Massachusetts resident taxpayers who are sole proprietors or shareholders, partners or members of pass-through entities are entitled to a credit for taxes due any other jurisdiction for taxes paid by such sole proprietors or entities to other jurisdictions.
S Corporations and Their Shareholders:
A Massachusetts shareholder of an S corporation may claim the credit for taxes due any other jurisdiction for a taxable year if the S corporation pays or is obligated to pay a tax during the shareholder's taxable year and all of the following additional conditions apply:
- The tax is imposed by another state, territory, or possession of the United States, or the Dominion of Canada or its provinces;
- The tax is measured by income earned by the S corporation, the distributive share of which is required to be included in the shareholders' Massachusetts gross income. Credit for taxes paid to other states on property, net worth or excise tax does not qualify;
- The S corporation does not deduct any portion of the tax from its income in computing net income available for distribution to shareholders; and
- The tax is otherwise allowable as a credit under the provisions of G.L. c. 62, § 6(a).
S Corporation shareholders or partners must obtain a statement from the S Corporation or partnership if the credit is claimed as part of distributive income taxed in another jurisdiction. The statement must list the taxes paid on behalf of the shareholder or partner and specify where the taxes were paid.
Gross Receipts Based Taxes:
This credit extends only to those taxes that are imposed on net income; the credit does not extend to taxes based on or derived directly from gross receipts.
Gross receipts based taxes include:
- GRT, Washington Gross Receipts Tax;
- GMT, Texas Gross Margin Tax;
- CAT, Ohio Commercial Activity tax.
Gross receipts-based taxes like the GRT, GMT and CAT are each taxes imposed for the privilege of doing business in a state. These taxes are not based on income and are due whether a business is profitable or not. Therefore, these taxes are not in the nature of net income taxes imposed on taxpayers, either directly or by imposition on pass-through entities in which the taxpayers are members.
Mandatory contributions imposed by the Rhode Island Temporary Disability Insurance Act (the “Act”) qualify as income taxes paid to the state of Rhode Island for the purposes of the OJ credit. The Act requires all employees doing business in Rhode Island to make mandatory contributions to the Rhode Island Disability Fund. The Act calculates these contributions according to the employees' income, and the payments are placed in the Fund to be used to provide relief for residents who are unemployed due to a disability.
The Department has defined an income tax as “a contribution, measured by a taxpayer’s ability to pay on the basis of income, exacted from those domiciled or doing business within a state, to defray the expenses of government.” Letter Ruling 77-10, in which the Commissioner ruled that payments made under the Rhode Island Temporary Disability Insurance Act were not the type of income taxes referred to in G.L. c. 62, § 6(a) has been revoked.
To recalculate the credit, the Rhode Island State Disability Insurance (RISDI) should be included as part of the total tax paid to Rhode Island; the computation of the credit is based on comparing the Massachusetts income tax on income reported to Rhode Island to the actual tax plus any RISDI paid; the credit is limited to the smaller of these two amounts.
Income Taxed at a Different Rate:
In calculating the allowable credit, a separate calculation should be prepared for each item of income taxed at a different rate. For example, Part B income requires a separate calculation from Part C income items.
- Residents must calculate the credit on the Schedule Z, Part 2, Line11 Worksheet Income Tax Paid to Another Jurisdiction, 2013 Form 1 Instructions, Page 22 . If qualified, enter the amount from Line 9 of the worksheet on Mass Form 1, Schedule Z, Part 2, Line 10. Enter the two-letter state or jurisdiction postal code(s).
- Part-year residents must calculate the credit on the Schedule Z, Part 2, Line11 Worksheet Income Tax Paid to Another Jurisdiction, 2013 Form 1-NR/PY Instructions, Page 26 file size 1MB . If qualified, enter the amount from Line 9 of the worksheet on Mass Form 1-NR/PY, Schedule Z, Part 2, Line 10. Enter the two-letter state or jurisdiction postal code(s).
- Copy of the personal income tax return from the other state or jurisdiction;
- Copy of Massachusetts Form 1 or 1-NR/PY, Schedule Z - Line 12 Worksheet, from the instruction booklet, showing the correct calculation of the credit;
- For income taxed at different rates, a separate worksheet for each rate of income;
- For S Corporation shareholder or a partner, a statement from the S corporation or partnership showing the distributive income taxed in another jurisdiction. The statement must list the taxes paid on behalf of the shareholder or partner and specify where the taxes were paid.
- M.G.L. Chapter 62, Section 6(a)
- 830 CMR 62.17A.1(5)(e) (emphasis added)
- Revised DD 12-1: G.L. c. 62, s. 6(a) Credit for Taxes Paid to Another Jurisdiction: Insurance Fund Payments Made Pursuant to Rhode Island Law
- DD 08-7: Gross Receipts-Based Taxes - Disallowance of Both the G.L. c. 62, s. 6(a) Credit and the G.L. c. 63, s. 30.4 Deduction for Taxes Paid to Another Jurisdiction
- DD 08-6: Credit for Taxes Paid to Another Jurisdiction
- DD 93-2: Credit for Taxed Due Other Jurisdictions (aggregate vs. separate computation when a taxpayer is subject to tax in at least two other jurisdictions)
- LR 94-8: Credit for District of Columbia Unincorporated Franchise Tax
- LR 87-10: Partnership Income; Credit to Partners for Taxes Paid to Another Jurisdiction (New Hampshire business profits tax)