- Massachusetts and Federal Excluded Income
- Income Excluded from Massachusetts but Included in Federal
- Income Excluded from Federal but Included in Massachusetts
- Income Reported but then Deducted on Schedule B or Y
- Limitation of Losses
- Military Service Compensation
- Mortgage Forgiveness
- Other Income/Loss
- Passive Activity Losses
- Prizes / Awards
- Where to Report on Original Tax Return; What to Enclose
- Massachusetts and Federal References
The following fees are included in Massachusetts gross income:
- bartering income not reported on Schedule C (fair market value of goods or services received in payment for services);
- director's fees;
- election worker payments;
- compensation earned as executor or administrator of an estate;
- tips not included on the Form W-2.
Limitation of Losses
Massachusetts adopts the federal definition of "capital gain income" to include the restrictions on the deductions of losses from personal use property under I.R.C. §§ 165(c), 262 and 267. DOR had adopted these restrictions in its tax reporting forms and in its proposed capital gains regulation.
I.R.C. § 165(c) Limitation of Losses of Individuals:
- losses incurred in a trade or business;
- losses incurred in a transaction for profit even if not a trade or business;
- losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty or from theft.
The first two above are allowable losses in Massachusetts. The last is not allowed because it is a personal casualty loss claimed as a U.S. Schedule A deduction for federal purposes.
I.R.C. § 262 prohibits the deduction of losses for personal, living and family expenses
I.R.C. § 267 prohibits the deduction of losses from related party transactions.
A loss from property held for personal use including a personal residence, household goods, a personal automobile, etc. is not deductible.
The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142) amended I.R.C. §108(a) by adding an exclusion for indebtedness that is discharged before January 1, 2010 and is qualified principal residence indebtedness. The Economic Stabilization Act of 2008 extended this exclusion until January 1, 2013. Massachusetts does not adopt this exclusion or the extension because they were enacted after January 1, 2005. Generally, DOR follows the provisions of the Code as of January 1, 2005, with certain exceptions. Under the January 1, 2005 Code, this exclusion was not available.
- pre-1996 installment sales classified as ordinary income for Massachusetts purposes (from Massachusetts Schedule D, Line 9);
- embezzled or other income from illegal activities;
- awards and bonuses received from an employer for performance of services not part of a qualified award plan;
- any other Form 1, Line 10 or 1-NR/PY, Line 12 income reported on U.S. 1040, Line 21 and not reported elsewhere on the Massachusetts return.
Other Income and Losses Not Included
- any "net operating loss" reported as a negative amount on U.S. Form, Line 21;
- refunds of U.S. and Massachusetts income taxes are not considered income under Massachusetts law. Interest on refunds, however, should be reported on Massachusetts Schedule B.
- passive activities;
- nonpassive activities.
- trade or business activities, including sole proprietorships, farms, partnerships, S-corporations, and limited liability companies in which individuals do not materially participate under the rules of I.R.C. § 469(h) during the year; and
- rental activities including equipment leasing and rental real estate, even if individuals materially participate under the rules of I.R.C. § 469(h) in them during the year, unless they are real estate professionals.
Note: A limited partner is generally passive due to more restrictive tests for material participation. As a result, limited partners will generally have passive income or losses from the partnership;
Nonpassive Activities - income and losses from the following activities:
- businesses, including sole proprietorships, farms, partnerships, S-corporations, limited liability companies and trusts in which the taxpayer does materially participate on a regular, continuous, and substantial basis;
- gains and losses on stocks and bonds;
- guaranteed payments;
- interest income;
- lottery winnings;
- royalties derived in the ordinary course of business;
- salaries, wages, and 1099 commission income;
- sale of undeveloped land or other investment property.
The passive activity rules apply to:
- Trusts (other than grantor trusts);
- Personal service corporations; and
- Closely held corporations.
Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities.
Federal Treatment of Passive Activity Losses:
Federal law limits passive activity loss deductions. In general, a passive activity loss is the amount, if any, by which the passive activity deductions for the taxable year exceed the passive activity gross income for the taxable year. Taxpayers may deduct passive activity losses only from passive activity income (a limit on loss deductions).
- Calculation of Passive Activity Losses:
- the passive activity loss may not be deducted from other income for the taxable year;
- the passive activity loss is suspended and carried forward to reduce passive activity income generated in future years;
- a taxpayer who disposes of the taxpayer's entire interest in the activity in a fully taxable transaction to an unrelated party may at the time of disposition claim any unused suspended deductions in full;
- a taxpayer must maintain records sufficient to substantiate passive activity income and losses.
- $25,000 Offset for Rental Real Estate Activities with Active Participation as defined under I.R.C. § 469(i)(6) :
As an exception to the general rule, qualifying taxpayers who actively participate in certain rental real estate activities may deduct from other income up to $25,000 in losses and credits.
Qualifying married persons filing joint returns may deduct up to the full amount. Qualifying married taxpayers filing separate returns who lived apart during the entire taxable year are eligible to deduct up to one-half of the allowable income and phase-out amounts. Qualifying married taxpayers filing separate federal returns who lived together at any time during the taxable year are not entitled to any offset.
A single taxpayer has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Since she actively participated in her rental real estate activities, she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages).
Massachusetts Treatment of Passive Activity Losses:
The federal income tax limitations and phase-out amounts for passive activity loss deductions and rental real estate apply for Massachusetts income tax purposes.
- Calculation of Passive Activity Losses
Allowable losses are generally the same losses that are allowed on federal Form 8582. To the extent that there are applicable adjustments for Massachusetts differences, taxpayer must calculate allowable losses on a pro-forma U.S. Form 8582.
Also, the net passive activity income or loss is generally the same as allowed on federal Form 8582. To the extent there are applicable adjustments for Massachusetts differences, taxpayers must calculate allowable losses on a pro forma federal Form 8582. Losses disallowed for federal purposes are likewise disallowed for Massachusetts purposes.
- $25,000 Offset for Rental Real Estate Activities with Active Participation
Massachusetts follows the federal rules for applying the $25,000 offset for rental real estate activities with active participation. The federal rules apply even if the taxpayers were allowed to file joint federal returns but were unable to file joint Massachusetts returns because of different Massachusetts filing requirements.
- Offsetting Excess Part B Passive Losses Against Part A Income
Generally, taxpayers may not use excess Part B deductions to offset other income. However, where the taxpayer files a Massachusetts Schedule C or Schedule E, Massachusetts law allows such offsets if the following requirements are met:
- the excess Part B deductions must be adjusted gross income deductions allowed under M.G.L. c. 62, s. 2(d); and
- these excess deductions may only be used to offset other income which is effectively connected with the active conduct or a trade or business or any other income allowed under I.R.C. § 469(d)(1)(B) to offset loses from passive activities.
If these requirements are met:
- The excess of Form 1 or Form 1-NR/PY adjusted gross income deductions over gross income may be used to offset Schedule B and D income, but only to the extent that the income is effectively connected with the active conduct of a trade or business of the taxpayer;
- Carryover passive losses which may be taken upon disposition of a taxpayer's entire interest in the passive activity to an unrelated party in a fully taxable transaction may be used to offset Form1 or Form 1-NR or Schedule B and D income in the following order:
- Form1 or Form 1-NR income attributable to the disposed passive activity for the taxable year;
- Schedule B and D income attributable to all other passive activities for the taxable year;
- Any other Form1 or Form 1-NR income;
- Schedule B and D income attributable to the disposed passive activity for the taxable year;
- Other Schedule B and D income which is effectively connected with the active conduct of a trade or business of the taxpayer.
Passive Activity Losses vs. Net Operating Losses:
Please note that passive loss carryover deductions are different from net operating loss deductions. Under G.L. c. 62, s. 2(d)(1)(C) net operating loss deductions under Code § 172 are not deductions for Massachusetts purposes.
Nonresidents must recalculate allowed passive activity losses based upon income or losses from passive activities which generate income subject to tax in Massachusetts. To do so, the taxpayer must complete a pro forma federal Form 8582, using only those amounts from activities which generate income subject to Massachusetts tax. When completing the pro forma federal Form 8582, the taxpayer must limit the amount of the $25,000 allowance for rental real estate activities with active participation to the amount which was allowed the taxpayer for federal purposes.
Part-year residents who meet the Massachusetts threshold income and exemption and who change status during a single taxable year from resident to nonresident, or from nonresident to resident must figure passive activity losses separately for their periods of residency and nonresidency.
For Examples, see TIR 89-2 below
Same-sex joint filers: Same sex joint filers should use Federal Form 8582 to recalculate their loss limitations as if they were filing a joint federal return. (See TIR 04-17 for more information.) Note: the federal limitation favors single filers over married filers because federal law provides the same offset limitation to married couples that it provides to single taxpayers.
Prizes and Awards
Prizes and awards are included in Massachusetts gross income to the same extent they are included federally.
Pulitzer, Nobel, and Similar Prizes:
If taxpayers are awarded a prize in recognition of past accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, they generally must include the value of the prize in gross income.
These prizes, however, may be excluded from gross income if all of the following requirements are met:
- the recipient is selected without any action on his part;
- The recipient is not required to perform substantial future services as a condition of receiving the prize or award; and
- The recipient assigns the prize or award to a governmental unit or tax exempt charitable organization.
Prizes and awards received from the following sources are included in gross income and taxed at fair market value:
- beauty contests;
- quiz programs.
A prize of merchandise is taxable at fair market value.
Employee achievement awards do not follow the same rules as the exceptions above. They are taxable unless they meet special rules for awards of tangible personal property given in recognition of length of service or safety achievement. Cash awards, gift certificates and similar items are taxable. Gross income will not include the value of the award if the cost to the employer does not exceed the amount allowable as a deduction to the employer for the cost of the award.
- The amount of fees and other income reported on U.S. Form 1040 must be entered on either Mass Form 1 or Form 1-NR/PY, Schedule X, Line 4. Do not enter less than "0."
- exclude other income included in Federal AGI, i.e. Social Security payments;
- include other income excluded in Federal AGI, i.e., Earned income from other sources.
For Jury Duty, the amount can then be deducted on Schedule Y, Line 9 provided jury duty pay is surrendered by the employee to the employer in return for continuing the employee's normal salary while on jury duty.
- M.G.L. Chapter 62, Section 1(m) as amended by St. 1998, c. 175, s. 7
- M.G.L. Chapter 62, Sections 2(a); 2(c)(1); 2(d)
- TIR 04-17: Massachusetts Tax Issues Associated with Same-Sex Marriages
- TIR 02-18: Tax Changes Contained in "An Act Enhancing State Revenues" and Related Acts
- TIR 98-15: The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax ("Code Update")
- TIR 89-2: Massachusetts Income Tax Treatment of Passive Activity Losses under Sec. 469 of the Internal Revenue Code
- I.R.C. §§ 74; 165(c); 262; 267 469, (g), (h), (i), (i)(5)
- Temp. Reg. § 1.469-2T(b)(1)
- The federal Tax Reform Act of 1986 ("TRA '86")