- General Rules
- Income Excluded from Federal and Massachusetts Gross Income
- Federal Gross Income
- Massachusetts Gross Income
- Massachusetts and Federal References
To calculate Massachusetts gross income, Massachusetts uses federal gross income, as determined by the U.S. Internal Revenue Code (I.R.C.) in effect on January 1, 2005, as a starting point. Income which is included in federal gross income will be part of Massachusetts gross income unless it is specifically excluded by some provision of Massachusetts law. Conversely, an item which is not included in federal gross income will not be part of Massachusetts gross income unless it is specifically added by some provision of Massachusetts law.
Income to Be Added to Federal Gross Income:
Certain items of income must be added to federal gross income to arrive at Massachusetts gross income. These items of income are exempt from federal income taxation. Such income is, however, part of Massachusetts gross income, taxable under the provisions of c. 62, s. 2(a)(1)(A)-(I).
Income to Be Subtracted from Federal Gross Income:
Certain items of income must be subtracted from federal gross income to arrive at Massachusetts gross income. These items of income are taxable at the federal level. Such income is, however, exempt from Massachusetts income tax under the provisions of c. 62 s. 2(a)(2)(A) - (P).
Federal gross income means income from whatever source derived, including (but not limited to) the following items:
- alimony and separate maintenance payments;
- compensation for services, including fees, commissions, fringe benefits and similar items (W-2 wages);
- distributive share of partnership gross income;
- dividends (from shares of stock in a company) (Schedule D);
- gains derived from dealings in property (Capital gains from sale or exchange of property);
- gross income derived from business (Schedule C);
- income from life insurance and endowment contracts;
- income from discharge of indebtedness (forgiveness of credit card debt);
- income in respect of a decedent;
- income from an interest in an estate or trust (Schedule B);
- interest (from bank, insurance policies, debt instruments, etc);
- pensions (1099R);
- rents (Schedule E);
- royalties (Schedule E)
- Interest Income from State and Local Obligations (Other than Massachusetts) Excluded under I.R.C. § 103
Massachusetts gross income includes interest on state and local obligations to the extent such interest is excluded from federal gross income. These excluded amounts are reported for informational purposes only on U.S. Form 1040, Line 8b and therefore are included on Line 1 of Massachusetts Schedule B. However, interest from obligations issued by the Commonwealth or any political subdivision is not taxable and therefore will be subtracted on line 6 of Massachusetts Schedule B.
- Employee Contributions to Qualified Massachusetts Pension Plan Excluded under I.R.C. § 414(h)
These amounts are excluded from federal gross income; for Massachusetts, such amounts are added back to compute gross income so that a taxpayer may claim the deduction under c. 62, s. 3B(a)(4) for contributions made to a Massachusetts annuity, pension, endowment or retirement fund. The maximum deduction allowed is $2,000 per taxpayer. The payments added back are reflected in Massachusetts wages as shown in Box 16 of the W-2 statement. This amount will be more than the amount shown as Federal wages in Box 1 of the W-2.
- Earned Income from Foreign Sources Excluded under I.R.C. § 911
For federal purposes, income earned abroad by Massachusetts residents is excluded from gross income; such amount is added back to arrive at Massachusetts income.
- Amounts Included or Considered to be Massachusetts Gross Income under Any other Provision of This Chapter
- Net Operating Loss Carry Forward under I.R.C. § 172
Massachusetts does not allow for the federal provisions to either carry back or carry forward any unused net operating loss.
- Interest Income from Certain U.S. Obligations
Massachusetts gross income does not include interest on obligations of the United States to the extent such interest is included in federal gross income per I.R.C. § 61 (unlike interest from state and local obligations which is excludible under I.R.C. § 103.) These amounts are reported and taxed on U.S. Form 1040, Line 8a and therefore are included on Line 1 of Massachusetts Schedule B. These amounts are then excluded on Line 6 of Schedule B to the extent included in federal gross income.
- Pension Income - Employee Massachusetts and U.S. Government Contributory Plan
Massachusetts gross income does not include income from a contributory annuity, pension, endowment or retirement fund of the United States government or the Commonwealth or any political subdivision that is included in federal gross income per I.R.C. §402..
- Pension Income - U.S. Military Non-Contributory Pension Plan
Massachusetts gross income does not include noncontributory pension income or survivorship benefits received from the U.S. uniformed services. This includes pensions from the Army, Navy, Marine Corps, Air Force, Coast Guard, commissioned corps of the Public Health Service and the National Oceanic and Atmospheric Administration.
- Previously Taxed Income from Annuity, Stock Bonus, Pension, Profit Sharing Plans and IRAs
Massachusetts gross income does not include distributions from annuities, pensions, etc. described in I.R.C. §§ 403(b) and 404, IRAs described in I.R.C. §§ 408 and 409, and Keogh plans that represent previously taxed income. Only the distribution amounts over the previously taxed income are taxable.
- Social Security Benefits
Massachusetts gross income does not include Social Security benefits. Such amounts may be included in federal gross income depending on income thresholds under I.R.C. § 86.
- State Tax Refund
Massachusetts gross income does not include state tax refunds that are included in federal gross income of those taxpayers who itemized deductions per I.R.C. § 111.
- Disability Income Payments Due to Terrorist Activity
Massachusetts gross income does not include amounts received by an individual as disability income to the extent included in federal gross income attributable to injuries incurred as a direct result of a terrorist or military action as defined in I.R.C. § 692(c)(2 in effect for the current taxable year.
Dividends from a Corporate Trust that are Exempt from Tax under c. 62 s. 8
Massachusetts gross income does not include dividends from a corporate trust subject to taxation under section 8 to the extent derived from earnings and profits previously taxed to the trust under section 8, but only if that the trust properly filed returns and paid all taxes due.
- Employer Death Benefits to Terrorist Victims
Massachusetts gross income does not include amounts paid by an employer by reason of the death of an employee who is a specified terrorist victim to the extent such amount is included in Federal gross income. This provision does not apply to (i) amounts which would have been payable after death if the individual had died other than as said specified terrorist victim; and (ii) incidental death benefits paid from a plan described in the provisions of I.R.C. §401(a) and exempt from tax under I.R.C. §501(a).
- Exempt Capital Gain Dividends Received from a Regulated Investment Company
Massachusetts gross income does not include dividends received from a regulated investment company qualifying under I.R.C. § 851 which are capital gain dividends under I.R.C. § 852, but only to the extent that such capital gain dividends are attributable to gain from Massachusetts obligations that is exempt from taxation under any provision.
- Exempt Interest Dividends Received from a Regulated Investment Company
Massachusetts gross income does not include dividends received from a regulated investment company qualifying under I.R.C. § 851 which are exempt interest dividends under I.R.C. § 852, but only to the extent that such exempt interest dividends directly attributable to interest from Massachusetts obligations that is exempt from taxation under any provision.
- Holocaust Survivors Payments
Massachusetts gross income does not include distributions or payments, including interest, made to an individual because of his/her status as a victim of Nazi persecution, nor income attributable to, derived from, or related to assets stolen or hidden from or lost to Germany, immediately prior to, during or immediately after WW II. The amount not included is to the Extent such amount is Included in Federal Gross Income.
- Imputed Income Due to MA Health Insurance Requirements
- Income from U.S. Patents Issued to Massachusetts Residents As Useful for Energy Conservation
Any income received from the sale, lease or other transfer of a patent approved by the Commissioner of energy resources, including royalty income and any income received from the sale, lease, or transfer of property subject to the patent is deducted from federal gross income for a period not to exceed five years from the date of the issuance of the U.S. patent.
- Massachusetts Trust Income Received from any Trustee or Fiduciary
Massachusetts gross income does not include income received from any trustee or other fiduciary that is taxable under Chapter 62 to the trustee or fiduciary.
- Payments Under §406 of the Air Transportation Safety and System Stabilization Act
- Qualified Disaster Relief Payments Received by an Individual
Massachusetts gross income does not include any amount paid to or for the benefit of an individual (a) to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; (b) to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation, of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster, (c) by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or (d) if such amount is paid by the United States or a state or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare, but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise. Amounts excluded are to the extent included in federal gross income.
- Relief of Indebtedness Income to Terrorist Victims
Massachusetts gross income does not include any amount which, but for this section, would be included in gross income by reason of the discharge, in whole or in part, of indebtedness of any taxpayer if the discharge is by reason of the death of an individual incurred as the result of the terrorist attacks against the United States on September 11, 2001, or as the result of illness incurred as a result of an attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002.
Residents, Part-Year Residents, Nonresidents
Massachusetts Gross Income for:
- Residents, include gross income from all sources, both in and out of Massachusetts.
- Part-year residents, include gross income from all sources during their residency period.
- Nonresidents, include gross income derived from sources within Massachusetts. This income includes items of gross income derived from or effectively connected with:
- any trade of business, including any employment carried on by the taxpayer in Massachusetts, whether or not the nonresident is actively engaged in a trade or business or employment in Massachusetts in the year in which the income is received;
- the participation in any lottery or wagering transaction in Massachusetts;
- the ownership of (or any interest in) real or tangible personal property located in Massachusetts;
- interest and gains from trade or business conducted in Massachusetts.
After modifying Massachusetts gross income by adding or subtracting items to federal gross income, Massachusetts gross income is then divided into three parts:
- Massachusetts Schedule B (Part A income) is total interest, dividends and certain capital gains.
Certain capital gains included in Massachusetts Schedule B:
- current year short-term capital gains (including collectibles);
- long-term capital gains on collectibles and pre-1996 installment sales; and
- gains on the sale of property used in a trade or business (4797 property) held for one year or less.
Interest income excluded from Massachusetts Schedule B:
- interest from savings deposits in Massachusetts banks; and
- interest from loans made by pawn brokers.
- Massachusetts Form 1, Line 10 or 1-NR/PY, Line 12 income (Part B income) is Massachusetts gross income not included in Schedule B or D which includes wages, salaries, pensions, business income, rental income, alimony and winnings, etc.
Interest income included in Massachusetts Form 1 or 1-NR/PY:
- interest from savings deposits in Massachusetts banks; and
- interest from loans made by pawn brokers.
- Massachusetts Schedule D (Part C income) is long-term capital gain income.
Capital Gains excluded from Massachusetts Schedule D:
- long-term capital gains from collectibles; and
- long-term capital gains from pre-1996 installment sales.
After determining Massachusetts Part B, Part A and Part C gross income, each category is further modified to first reach Part B, Part A and Part C adjusted gross income and, finally, Part B, Part A and Part C taxable income.
- M.G.L. Chapter 62, Sections 1(a); 2(a), 2(a)(1), 2(a)(2); 2(b); 2(d) ), 2(d)(1); 2(e)
- M.G.L. Chapter 62, Section 2(c) as amended by St. 1999, c. 127, s. 64 adding new 2(c)(2)(a) and 2(c)(2)(b)
- TIR 02-19: Massachusetts State Tax Relief for Victims of Terrorist Attacks
- TIR 00-8: Deduction for Certain Payments Made to Holocaust Survivors
- TIR 98-15: The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax
- TIR 98-8: Massachusetts 1998 Reducing Income Taxes Act
- TIR 89-8: Income Tax Treatment of Interest and Gains on Federal Obligations
- TIR 80-2: Income Tax Treatment of Interest and Gains on Certain Bonds
- DD 88-19: Loss on Sale of Tax-Exempt Bonds
- LR 84-41: Zero Coupon Bonds Issues by Non-Massachusetts Municipalities; Original Issue Discount
- I.R.C. §§ 61(a); 62; 86; 103; 162; 164(f); 165; 172; 219; 402(e)(3); 404; 408; 409; 414; 851; 852; 911; 1379(b)(3)