- Compensation for Active Service in a Combat Zone by Members of the U.S. Armed Forces
- Court Awards and Damages
- Death Benefits
- Holocaust Survivors Payments
- Injury Benefits
- Life Insurance Policies/Premiums/Benefits
- Sick Pay
- Workers' Compensation
- Where to Report, What to Enclose
- Documentation to Submit for Abatement or Amended Return
- Massachusetts and Federal References
Compensation for Active Service in a Combat Zone
Compensation received for active service in a combat zone by members of the armed forces of the United States is excluded from Massachusetts gross income. Income earned for active service for any month during which a member below the grade of commissioned officer served or was hospitalized as a result of injuries received during service in a combat zone is excluded from gross income; a portion of such income earned by commissioned officers is also excluded.
Designated combat zones include/have included: the Persian Gulf, Kosovo and Afghanistan.
Massachusetts gross income is based on federal gross income. Massachusetts adopts the Internal Revenue Code as of January 1, 2005. Since the relevant federal provisions were enacted before January 1, 2005, Massachusetts excludes from income, to the same extent as the Code, compensation earned by members of the armed forces for service in a combat zone.
- interest on any award;
- compensation for lost wages or lost profits (including compensation related to age discrimination settlements);
- punitive damages;
- amounts received in settlement of pension rights (if taxpayer did not contribute to the plan.);
- damages for:
- patent or copyright infringement;
- breach of contract;
- interference with business operations.
Settlement amounts for compensatory damages that are excluded from gross income are:
- personal injury or sickness (whether received in a lump sum or installments);
- physical injury or illness;
- alienation of affection;
- surrender of custody of a minor child.
Whether damages are fully or partially taxed on the Massachusetts return, litigation costs may not be deducted. Litigation costs are federal miscellaneous expenses on Schedule A which are not allowed for Massachusetts purposes.
Gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract if such amounts are paid by reason of the death of the insured. Generally, all amounts payable on the death of the insured are excluded, whether these amounts represent the return of premiums paid, the increased value of the policy due to investment, or the death benefit feature (i.e., the policy proceeds exceeding the value of the contract immediately prior to the death of the insured.)
Deceased Public Safety Officers:
The $50,000 death benefit paid to a surviving dependent of a public safety officer who died in the line of duty is not taxable.
Accelerated Death Benefits paid under a life insurance contract (including sales or assignments to viatical settlement providers) for terminally and chronically ill insured individuals are excluded from federal and Massachusetts gross income. Previously, amounts received before death were included in gross income to the extent the amount received constituted cash value in excess of the taxpayer's investment in the contract. Massachusetts now allows the full amount of the benefits to be excluded to the same extent as they are excluded from federal gross income.
Note: A viatical settlement provider is a person regularly engaged in the trade or business of purchasing, or taking assignment of, life insurance contracts on the lives of insureds.
Interest Earned on Benefits:
If any amount excluded from gross income is held under an agreement to pay interest on such amount, the interest payments are included in gross income.
Holocaust Survivors Payments
For tax years beginning on or after January 1, 1998, the following items are deducted from federal gross income, to the extent included therein, in determining Massachusetts gross income:
- Distributions or payments, including interest, made to an individual taxpayer because of his/her status as a victim of Nazi persecution or due to the taxpayer's status as an heir to such victim, so long as the victim or heir of a deceased victim is the first recipient of such property or assets;
- Income attributable to, derived from, or related to stolen assets which may include compensation, reparation, or interest on and the proceeds of insurance policies issued to a victim of Nazi persecution by European insurance companies immediately prior to or during World War II. For income attributable to stolen assets, the deduction is allowed only to that taxpayer who either was a victim of Nazi persecution or who is an heir of such victim and who was also the first recipient of the stolen assets after recovery.
This deduction does not apply to income attributable to property that victims acquire using or spending recovered assets or acquire with proceeds from the sale of the recovered assets.
Example: A victim recovers stolen shares of stock that he sells to purchase shares in a mutual fund. The income derived from mutual funds is not deductible from gross income.
Injury Payments to Police, Fire and Public Safety Personnel:
Compensation paid to Police, Fire, and Public Safety personnel who are granted leaves of absence because of injuries sustained in the performance of their duties is not subject to Massachusetts income taxation and does not constitute wages subject to withholding. Employees should report these amounts as wages and next to the amount, write "see attached statement." The same amount is then taken as a deduction on Schedule Y.
Incapacitated Firefighter or Police Officer Income Exclusion - Schedule Y Deduction:
Although income received by a firefighter, police or correctional officer incapacitated in the line of duty is excluded from Massachusetts gross income, the income received must be included in the employee's Massachusetts gross income and reported as "wages." The amount is then claimed as a Schedule Y deduction.
No Tax Status and Limited Income Credit Calculation:
This deduction impacts the calculation of No Tax Status and the Limited Income Credit as it is treated as an adjustment to arrive at Massachusetts adjusted gross income on the Massachusetts AGI Worksheet and Schedule NTS-L-NR/PY.
Nonresidents and part-year residents may claim this deduction only if it is directly related to taxable income reported on Form 1 NR/PY.
Life Insurance Policies/Premiums/Benefits
Life Insurance Proceeds:
Life insurance proceeds paid to a beneficiary are not taxable if received in a lump sum payment based on the amount due at the insured person's date of death.
Surrender of Policy for Cash:
Proceeds are considered ordinary income to the extent they exceed the premiums paid less dividends received.
Dividends paid as a Reduction of Premiums:
Dividends paid by the insurance company as a reduction of premiums are not taxable but they reduce the cost basis of the policy. Interest paid or credited on these dividends (if left with the insurance company) is taxable as Part A, interest and dividends and is reported on Schedule B.
Interest received on an Insurance Policy:
Any amounts in excess of what would be payable at the time of the insured person's death is considered interest. This interest is taxable at the Part A, interest and dividends and is reported on Schedule B (including interest from SBLI purchased through a Mass. bank).
Group-Term Life Insurance Premiums:
An employee's gross income does not include the cost of up to $50,000 of group-term life insurance coverage provided by an employer (or former employer.) However, an employee's gross income does include the cost of employer-provided insurance that is more than the cost of $50,000 of coverage. If an employee pays any part of the cost of the insurance, the entire payment reduces, dollar for dollar, the amount that would otherwise be included in gross income.
The amount of group-term life insurance premiums included in gross income is reported by the employer as part of an employee's wages in box 1 and 16 of Form W-2. It is also shown separately in box 12 with code C.
Sick pay benefits received from an employer or from a plan paid for by an employer are taxable as wages. However in certain instances, employee benefits may be taxable as wages depending on employees' payments.
The rules for the taxability of sick pay received are as follow:
- If the employer pays all of the premiums for employees' sick pay insurance, the benefits received are taxable and are included as wages;
- If employees pay all of the costs of their own coverage, the benefits received are not taxable;
- If employees pay all or part of the cost of their sick pay insurance coverage with "pre-tax" dollars, the benefits received are taxable and are included as wages;
- If the employer and employees share the cost of the sick pay insurance for the employees, the portion of the benefits that matches the percent of the employer's contribution is taxable and included as wages income. The balance is not taxable income.
Nonresidents working for Massachusetts employers receiving sick pay paid by their employers should report them as wages. The same rules apply for nonresidents as residents.
The amount of taxable income will appear in the wage boxes of the W-2, federal wages in box 1 and state wages in box 16. The amount of the benefit that is not taxable will appear in box 13 and will be labeled with a "J".
Sick pay received from an employer is subject to income tax withholding as if it were wages. If it is from a third party such as an insurance company, it is not subject to withholding unless requested by the taxpayer.
Under the Workmen's Compensation Acts, gross income does not include amounts received as compensation for personal injuries or sickness while employees are out of work. However, if an employee returns to work, is assigned to "light duties", and continues to receive workers compensation, such amounts are taxable.
Regular Salary Paid While Receiving Workers Compensation:
If an employer continues to pay a regular salary to an employee who is out of work and who is receiving workers compensation, the employee must turn over the workers compensation payments to the employer. The amount to be included in gross income is the difference between what was paid and what was returned.
Example: John was injured while at work and was out of work for two months. His company continued to pay his weekly salary of $475, and he also received workers compensation of $100 a week from the state.
He is required to turn over the workers compensation to his employer. The balance of $375 ($475 - $100) a week must be included in gross income as taxable wages.
Note: Not all payments for job related illness or injury qualify as tax free workers compensation. Unless the statute or regulation authorizing the disability payment restricts awards to "on the job" illness or injury, the payment will be taxable.
If Claiming the Incapacitated Firefighter or Police Officer Income Exclusion - Schedule Y Deduction
- For residents, the amount of income must be reported on Mass Form 1, Line 3 as wages and is then excluded on Schedule Y, Line 4. Fill in the appropriate oval.
- For nonresidents and part-year residents, the amount of income subject to Mass tax must be reported on Mass Form 1-NR/PY, Line 5 as wages and is then excluded on Schedule Y, Line 4. Fill in the appropriate oval.
- Substantiation of amounts to exclude.
- M.G.L. Chapter 62, Sections 2(a)
- M.G.L. Chapter 62, Sections 2(a)(2)(K) as added by St. 2000, c. 79, s. 2
- M.G.L. Chapter 41, Section 111 F
- TIR 03-8: Massachusetts Income Tax Filing Extensions for Military Personnel in the Persian Gulf Area
- TIR 02-4: Military Personnel Serving in Afghanistan
- TIR 00-8: Deduction for Certain Payments Made to Holocaust Survivors
- TIR 99-6: Military Personnel Serving in Kosovo
- LR 85-47: Withholding Requirements for Dependent Care Assistance, Sick Pay and Distributions from Qualified Plans
- LR 80-32: Compensation Paid to Injured Personnel Pursuant to G.L. c.41, § 111F
- I.R.C. §§ 101; 104(a); 105(a); 112; 264