Gifts and Inheritances

Value of Property Acquired:

  • Gross income does not include the value of property acquired by gift, bequest, devise or inheritance.
  • Gross income does include a bequest of income from property, i.e., a bequest of annual rent from the testator's property for ten years is taxable income to the beneficiary.

Income from Property Acquired:
Gross income does include the income earned from property acquired by gift, bequest, devise or inheritance, i.e., income received from the investment of property acquired or the proceeds from the sale of the property acquired.

Employee Gifts:
Income transferred by or for any employer to, or for the benefit of, an employee is included in gross income.


Scholarships and Grants

Scholarships and Grants paid to an individual may include the following amounts for:

  • qualified tuition and related expenses;
  • room and board or other living expenses;
  • payment for teaching, research, or other services required as a condition to receiving a scholarship or grant.

A qualified scholarship is defined as "for study at a qualified educational organization."

For Massachusetts Residents:

  • Qualified Tuition and Related Expenses Are Excluded from Gross Income:
    Qualified scholarship and grant amounts received by an individual who is a candidate for a degree at an educational institution are excluded from both federal and Massachusetts gross income.
  • Room and Board or Other Living Expenses Are Included in Gross Income:
    Amounts used for expenses such as room and board or other living expenses are not considered to be "qualified tuition and related expenses" and are included in federal gross income.
  • Teaching, Research or Other Service Payments Are Included in Gross Income:
    Amounts received by a student as payment for teaching, research, or other services in the nature of part-time employment required as a condition to receiving a scholarship or grant are included in both federal and Massachusetts gross income. However, Massachusetts does not adopt changes to I.R.C. § 117 enacted after 1/1/98.

Nonresidents:
Nonresidents are taxed only on items of gross income that are derived from or effectively connected with any trade or business, including 1) any employment carried on by the taxpayer in Massachusetts; 2) the participation in any lottery or wagering transaction in Massachusetts; or 3) the ownership of any interest in real or tangible personal property located in Massachusetts.

Qualified Tuition and Related Expenses Are Excluded from Gross Income:
Qualified scholarship and grant amounts received by an individual who is a candidate for a degree at an educational institution are excluded from both federal and Massachusetts gross income.

Room and Board or Other Living Expenses Are Excluded from Gross Income:
Amounts that are received by a nonresident and specifically designated for use for living expenses, are excluded from Massachusetts gross income since they are not derived from or effectively connected with any activity specified in G.L. s. 62, Section 5A(a).

Teaching, Research or Other Service Payments Paid to a Nonresident Are Included in Gross Income:
Therefore, scholarship and grant amounts received that are derived from or effectively connected with "teaching, research or other services" carried on by a nonresident in Massachusetts are includible in both federal and Massachusetts gross income and subject to Massachusetts personal income tax, regardless of whether such amounts are paid by a granting organization located within or without Massachusetts. The location of the payer or grantor is irrelevant. It is where the activities are carried on by the grantee that determines taxability of such amounts. 


Qualified Tuition Programs (QTPs) - I.R.C. § 529 Plans

I.R.C. § 529 - Qualified Tuition Programs (QTPs):
This Code section permits taxpayers (parent or other relative) to establish and maintain qualified tuition programs (QTPs) for designated beneficiaries in order to facilitate savings for higher education by allowing earnings on funds invested for college to be tax-free if spent for qualified higher education expenses.

QTPs can take two forms:

  • individuals may purchase tuition credits or certificates on behalf of a designated beneficiary entitling the beneficiary to a waiver or payment of the beneficiary's higher education expenses; or
  • they may make contributions to a cash account established to pay a beneficiary's higher education expenses.

The QTP itself is a tax-exempt trust that is only subject to federal tax on its unrelated business income.

Qualifying costs include tuition, fees, books, supplies, equipment and room and board.

The following rules apply to I.R.C. § 529 trusts:

  • account owners (those who make contributions on behalf of a beneficiary) make contributions with after-tax dollars;
  • contributions made to the account are treated as completed gifts, although the account owner retains some control over the distribution of the funds;
  • the designated beneficiary may be changed from the original beneficiary to a new beneficiary without triggering a distribution if the new beneficiary is a member of the family of the original beneficiary;
  • the earnings portion is the amount by which the distributed amount or the value of the education benefits exceeds contributions made on behalf of the beneficiary.

2002 Law Change Adding I.R.C. § 529 to the Current Code Definition:
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") has made Internal Revenue Code (Code) provisions relating to I.R.C. § 529 plans, and Massachusetts adopts the current federal Code with respect to these plans for tax years beginning on or after January 1, 2002.

Federal Treatment of I.R.C. § 529 Plans after EGTRRA - Effective January 1, 2002:
 

  • Exclusion from Income:
    Earnings distributed from QTPs are excluded from the beneficiary's federal gross income to the extent the distribution is used to pay for qualified higher education expenses. If the distribution exceeds the qualified higher education expenses, the amount excluded from gross income is the earnings amount multiplied by the ratio of qualified expenses to total distribution.
  • Eased Rollover Rules:
    Rollovers that do not trigger recognition of income include one transfer within any 12-month period for the same beneficiary between two different QTPs. A family member now includes the original beneficiary's first cousins.
  • Qualified Costs Expanded:
    Prior to 2002, a predetermined maximum amount for room and board qualified for QTP distributions. EGTRRA expanded the definition of higher education expenses to include actual living expenses charged by the educational institution, even if they are greater than the allowance amount. In addition, EGTRRA brought expenses incurred for special needs services by special needs students attending eligible educational institutions into the definition of higher education expenses.
  • Schools may Administer QTPs:
    EGTRRA also authorizes eligible educational institutions to establish and maintain QTPs for taxable years beginning after 2001 (although distributions from QTPs of private institutions are not excluded from the beneficiary's income until January 1, 2004). Previously, only a state or an agency or instrumentality of the state could establish and maintain a QTP.

Future Year Treatment of QTPs:
Unless the changes brought about by EGTRRA are extended by Congress, they will expire on December 31, 2010, and the federal tax treatment of Code I.R.C. § 529 Plans will return to what it was before January 1, 2002.

 

Massachusetts Higher Education Savings Plans:
Massachusetts has two plans established by the Massachusetts Educational Financing Authority (MEFA) to assist residents in saving for college:

 

  • U.Plan - College Tuition Prepayment Plans:
    The U.Plan Prepaid Tuition Program offers tuition inflation protection for students attending a participating Massachusetts institution. The owner purchases tuition certificates that can be redeemed at a designated maturity date. Each tuition certificate purchases a pre-determined percentage of tuition and mandatory fees at any of approximately 80 participating Massachusetts colleges or universities, both private and public. The percentage of tuition covered by a tuition certificate differs from one school to the next.

    Note on Taxation of U.Plan:
    The U.Plan is invested entirely in Massachusetts general obligation bonds. Income from these bonds is exempt from federal tax. Therefore, the earnings of the U.Plan are not taxed federally even though the U.Plan has never been certified as a qualified I.R.C. § 529 plan. Income from Massachusetts general obligation bonds is also exempt from tax in Massachusetts. As a result, the EGTRRA changes to I.R.C. § 529 do not affect the Massachusetts tax treatment of earnings on U.Plan accounts.
  • U.Fund - Savings Plans:
    The U.Fund College Investing Plan is managed by Fidelity Investments, and offers investment for college expenses in a professionally managed mutual fund. Fidelity's investment portfolios are structured so that the level of investment risk decreases as the beneficiary approaches college age. Distributions from the fund can be used to pay for tuition, fees, room, board, books and required supplies and equipment for a beneficiary at an eligible undergraduate or graduate educational institution.

Although no other QTPs have been established in Massachusetts, new QTPs may be developed in the future by eligible educational institutions, as permitted under EGTRRA. In addition, residents of Massachusetts may participate in I.R.C. § 529 plans established in other states. 


Massachusetts References:

 

Federal References:

  • I.R.C. §§ 102; 103(a); 117; 170(b)(1)(A)(ii); 529
  • The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRAA)
  • Treas. Reg. Section 1.117-2(a)(1)

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