Massachusetts Gross and Adjusted Gross Income

• Massachusetts Personal Income Computation of Tax (C.62) - Overview
• General Rules
• Income Excluded - Massachusetts and Federal
  • Compensation, Injury and Sickness Benefits
  • Employee (Fringe) Benefits
  • Other Items Specifically Excluded
  • Tax Relief for Victims of Terrorist Attacks
• Federal Gross Income
• Mass and Federal Differences
  • Excluded from Federal but Included in Massachusetts
  • Excluded from Massachusetts but Included in Federal
  • Interest - Federal and Massachusetts Differences
• Massachusetts Gross Income
  • Included but Then Deducted
  • Residents, Part-Year Residents, Nonresidents
  • Divided into 3 Parts
• Massachusetts Adjusted Gross Income
  • Federal Deductions Allowed
  • Federal Deductions Not Allowed
  • Table - Federal (U.S. 1040) Deductions Allowed on Massachusetts Schedule Y
  • Massachusetts Deductions - Schedules B and D
    
• Massachusetts and Federal References

Massachusetts Personal Income Computation of Tax (C.62) - Overview

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

General Rules

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 or business, including any employment carried on by the taxpayer in Massachusetts;
  • the participation in any lottery or wagering transaction in Massachusetts;
  • or the ownership of any interest in real or tangible personal property located 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.

Federal Gross Income
 
Federal gross income means income from whatever source derived, including (but not limited to) the following items:

• alimony and separate maintenance payments;
• annuities;
• 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);
• 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.
• interest (from bank, insurance policies, etc);
• pensions (1099r);
• rents (Schedule E);
• royalties (Schedule E

Income Excluded from Federal but Included in Massachusetts

• Interest Income from State (Other than MA) & Local Obligations 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.
  
• Massachusetts Retirement Contributory Payments
  Per 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 is excluded from gross income; such amount is added back to arrive at Massachusetts income.

Income Excluded from Massachusetts but Included in Federal:

• 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. 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 - Massachusetts and U.S. Government Contributory
  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.
  
• Pension Income - Military Noncontributory
  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 Plan
  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.
  
• 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 of the portion of such capital gain dividends attributable to gains from Massachusetts obligations that are exempt from taxation under any provision.
  
• Death Benefits Paid by Reason of the Death of an Employee Who is a Terrorist Victim to the Extent Included in Federal Gross Income
  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).
  
• Disability Income Related to a Terroristic or Military Action to the Extent Included in Federal Gross Income
  Massachusetts gross income does not include amounts received by an individual as disability 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.
  
• Disaster Relief Payment Resulting from a Terroristic or Military Action to the Extent Included in Federal Gross Income
  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.
  
• Discharge of Indebtedness by Reason of Death due to Terrorist Attack to the Extent Included in Federal Gross Income
  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.
  
• Dividends from a Corporate Trust that are Exempt from Tax under c. 62 s. 8
  Chapter 62, Section 8 exempts dividends from a corporate trust taxable under Section 8 except for dividends from the trust's tax-free earnings and profits.
  
• Dividends Received from a Regulated Investment Company Exempt from Tax
  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 of the portion of such exempt interest dividends directly attributable to interest from Massachusetts obligations that are exempt from taxation under any provision.
  
• Holocaust Survivors Payments to the Extent Included in Federal Gross Income
  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.
  
• Income Received from a Trustee or Other 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.
  
• 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.

Federal Deductions Allowed from Form 1 and 1-NR/PY Income:

Trade or business deductions allowable under I.R.C. § 62 (i.e., Schedule C and E, etc.) are:

• Deductions for contributions of employers to employees' qualified pension plan under I.R.C. § 404 with certain exceptions (DD 01-07);
• Expenses of travel, meals and lodging while away from home or transportation expenses relating to performance of services as an employee;
• Alimony paid;
• Student loan interest, medical savings account, and self-employed health insurance.

Table -- Federal (U.S. 1040) Deductions Allowed on 2011 Massachusetts Schedule Y

There are several adjustments (deductions) included in line 36 of the U.S. 1040: the sum total of lines 23 through 35, plus the total of all miscellaneous (certain qualified) deductions. There is no specific line item for these deductions. They are lumped into line 36 on the federal return, and they are all included on line 9 of Schedule Y on the Massachusetts return. The miscellaneous deductions are identified on the dotted line next to U.S. 1040 line 36 with the separate amounts and titles.

For each deduction, the amount from U.S. Form 1040 should be claimed on Massachusetts Form 1 or 1-NR/PY, Schedule Y as follows:

Federal Deductions Not Allowed from Form 1 and 1-NR/PY Income:

• Deductions related to income not included in Massachusetts gross income
  For example, Medicare deducted from social security benefits is not an allowable deduction since the benefits are not included in Massachusetts gross income.
  
• Depreciation bonus deduction allowed under I.R.C. § 168(k)
  For federal income tax purposes, taxpayers are entitled to an additional first-year depreciation deduction, under I.R.C. § 168(k), equal to a percentage of the adjusted basis of "qualified property" acquired by a certain date. Under 2002 legislation, Massachusetts decoupled from bonus depreciation allowed under I.R.C. § 168(k), as amended and in effect for the current year. Therefore, Massachusetts does not adopt this additional depreciation deduction.
  
• Forfeitures due to premature withdrawal of funds deduction allowed under I.R.C. § 165
  For Massachusetts purposes, this deduction is not allowed to the extent that the income represented by such forfeiture is not included in Massachusetts gross income.
  
• IRA (Retirement) contribution deduction allowed under I.R.C. § 219
  For federal purposes, an individual may deduct up to a maximum amount of contributions to an IRA if certain criteria are met. This includes any amount contributed to a 501(c)(18) plan. Massachusetts does not allow this deduction.
  
• Life tenant income beneficiaries deduction allowed under I.R.C. § 62(a)(5)
  For Massachusetts purposes, any deduction relating to life tenants and income beneficiaries of property is not allowed to the extent a trust or estate taxable under this section is allowed the deduction.
  
• Losses from the sale or exchange of property allowed under I.R.C. § 165(f)
  The IRS allows limited excess capital losses over capital gains that may be applied against other income as well as unused capital losses as capital losses in the succeeding years. Massachusetts does not allow these federal special capital loss treatments.
  
• Net operating loss deduction allowed 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.
  
• Ordinary income portion of a lump sum distribution deduction allowed under § 402(e)(3)
  The IRS allows an averaging election, which effectively taxes distributions in the year received at a reduced rate. This method for reporting the distribution is not available in Massachusetts. Massachusetts taxes the full distribution as shown on U.S. Form 4972, not the reduced amount of distribution reported on U.S. 1040.
  
• Political deductions
  For Massachusetts purposes, political deductions that are not allowed: any amount paid or incurred in connection with either influencing legislation; participating in any political campaign on behalf of or in opposition of any public office candidate; attempting to influence the general public with respect to elections or legislative matters; or communicating directly with an executive branch official in an attempt to influence them.
  
• Qualified pension plan deduction contributions made on behalf of a self employed individual allowed under I.R.C. § 404
  For Massachusetts purposes, a self employed individual as defined under I.R.C. § 401(c)(1) is not entitled to the deduction under 404 to the extent attributable to contributions made on behalf of himself.
  
  DD 99-4: Since an S corporation shareholder does not fall under the definition of a self employed individual, such shareholder is considered an employee and therefore does not need to add back the amount of contribution. Prior to this directive, DOR treated S Corporation shareholders as self-employed individuals.
  
• Qualified stock bonus and profit sharing plan deduction allowed under I.R.C. § 1379(b)(3)
  This deduction relates to amounts not received as benefits from certain qualified pension plans.
  
• S Corporation deduction, taxed as a corporate trust
  For Massachusetts purposes, any deduction allowed by Subchapter S of the Code with respect to a federal S corporation that is taxed as a corporate trust is not allowed since such deduction is claimed by the corporate trust.
  
• Self employment taxes one-half of tax paid deduction allowed under I.R.C. § 164(f)
  The IRS allows a deduction equal to one-half of self-employment taxes paid. Since self employment payments from U.S. Form SE may be claimed as a deduction up to $2,000 on either Massachusetts Form 1 or 1-NR/PY per G.L. c.62 s. 3B(a)(3), the IRS deduction is not allowed for Massachusetts purposes.
  
• State legislators' travel expenses away from home deduction allowed under I.R.C. § 162(h)
  Massachusetts does not allow these deductions.

Note: Trade or business deductions allowable under I.R.C. § 62 include:

• Trade or business deductions referenced by I.R.C. § 62(a)(1) which are deductions allowed by the current Internal Revenue Code (unless modified by M.G.L., Chapter 62);
• Trade or business deductions other than those referenced by I.R.C. § 62(a)(1) which are deductions allowed by the 1998 Internal Revenue Code;
• Other deductions allowable under I.R.C. § 62 of the 1998 Internal Revenue Code (unless specifically disallowed by M.G.L., Chapter 62).

The following Massachusetts Deductions are allowed - Schedules B and D

Interest, dividends and certain capital gains are further modified. Massachusetts generally does not follow federal rules with respect to these modifications c. 62 s. 2(c)(1)-(3):

• Allowable excess trade or business deductions only up to the amount of Part A interest, dividends and capital gains effectively connected with the active conduct of a trade or business of the taxpayer.
  
  Any remaining excess trade or business deductions may be deducted first against Part A net capital gains and then against Part C long-term capital gains but only up to the amount of income effectively connected with the active conduct of a trade or business of the taxpayer.
  
  Any unused excess deductions may not to be carried forward to subsequent tax years;
  
• Current short-term capital losses (including collectibles) as well as prior year short-term unused capital losses and losses on the sale of 4797 property held for one year or less may first offset short-term capital gains, long-term capital gains from collectibles and pre-1996 installment sales.
  
  Any remaining short-term capital losses may be deducted against Part A interest and dividends up to a maximum of $2,000;
  
• Net short-term capital losses are deductible against net long-term capital gains after first deducting amount against Part A Income (short-term capital gains, long-term capital gains from collectibles and pre-1996 installment sales, and interest and dividends up to $2,000.)
  
  Any remaining amount is deductible against any long-term gains remaining after the netting of long-term gains against long-term losses. The short-term losses are first deducted against transactions prior to May 1, 2002, the highest rate long-term gains through (in descending) the lowest rate long-term gains, and then against transactions after May 1, 2002.
  
  Any unused short-term losses are carried forward to the next tax year;
  
• Long-term capital losses are deductible against Part A income, but only after Part A income has been reduced by any excess Part B trade or business deductions and short-term losses. Losses are first applied against Part A interest and dividend up to a maximum of $2,000 if maximum was not already offset by short-term capital losses. The aggregate amount of the deductions for short-term and long-term capital losses against Part A interest and dividends cannot exceed $2,000.

Any remaining amount may be applied against Part A capital gains;

• 50% deduction for long-term capital gains from sale of collectibles and pre-1996 installment sales.

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 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)
  

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