Massachusetts Personal Income Computation of Tax (C.62)

• Income Excluded from both Federal and Massachusetts Gross Income
  •  Compensation, Injury and Sickness Benefits
  •  Employee (Fringe) Benefits
  •  Other Items Specifically Excluded
  •  Tax Relief for Victims of Terrorist Attacks
• Massachusetts Personal Income Computation of Tax
• General Rules
• Massachusetts and Federal References

Massachusetts Personal Income Computation of Tax

Start with Federal Gross Income

+ Income Excluded from Federal but included in Massachusetts

– Income Excluded from Massachusetts but Included in Federal

= Massachusetts Gross Income (Filing Requirement if in excess of $8,000)  

Massachusetts Gross Income is Divided into Three Parts:

* No Tax Status If Massachusetts Gross Income less certain deductions (AGI) is below certain thresholds, there is no tax due, but taxpayer is still required to file a return

Total Income Tax - Combine Schedule B, Form 1 and Schedule D income tax

– Nonrefundable Credits

= Income Tax After Credits (not below 0)

+ Voluntary Contributions + Use Tax Dueand  Health Care Penalty

– Estimated Tax Payments, Extension Payments  and Withholding

– Refundable EIC Credit

– Refundable Circuit Breaker Credit

= Overpayment or Tax Due

General Rules

To calculate Massachusetts taxable income, Massachusetts uses federal gross income, as determined by the U.S. Internal Revenue Code (I.R.C.) in effect on January 1, 1998, 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).

Massachusetts Gross Income for:

• Residents, includes gross income from all sources, both in and out of Massachusetts.
• Part-year residents, includes gross income from all sources during their residency period.
• Nonresidents, includes 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, comprised of 7 classes of income depending on the holding period of the asset.
  
  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.

Massachusetts References:

• 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

Federal References:

• 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)