- Capital/Ordinary Gains and Losses
- Gambling Winnings
- 401(k) Plans
- 403(b) Retirement Plan - TSA and TIAA-CREF
- 457 Deferred Compensation Plan
- IRA, Individual Retirement Account - Conversion of a Traditional IRA to a Roth
- Massachusetts Police or Fire Department Pension
- Military Pensions
- Other State's Tax Treatment of Out-of-State Employee Contributory Government Pensions
- Savings Incentive Match Plan for Employees - SIMPLE Accounts
- Simplified Employee Pension Plan - SEP or SEP IRA
- Workplace Retirement Plan Contributions Including "Catch-up" Contributions
- Unemployment Compensation
Gains from the Sale of Principal Residence
Member of the Uniformed Services or the Foreign Service
Massachusetts adopts the exclusion of gain from the sale of a principal residence allowed by I.R.C. § 121 as in effect for the taxable year (current Code). Thus, if gain from the sale of a principal residence is excludible under § 121 from federal gross income, the gain is likewise excludible from Massachusetts gross income. As such, Massachusetts adopted the federal provisions contained in the Military Family Relief Act of 2003 (Public Law 108-121), enacted November 11, 2003, which provided that qualified military and Foreign Service personnel could suspend for up to 10 years the time transferred away from home on official extended duty for purposes of applying the five-year portion of the two-out-of-five-year rule.
Individuals can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain from the sale of their principal residence if they have resided in the home for two of the five years preceding the sale. The new federal provision was retroactive for home sales after May 6, 1997. Although taxpayers normally had only three years to file an amended return, qualifying taxpayers who sold a residence before 2001 had until Nov. 10, 2004 to amend their returns for this purpose. Military personnel and individuals in support of the U.S. Armed Forces serving in a combat zone during the period Nov. 11, 2003, through Nov. 10, 2004, were entitled to additional time to amend their returns.
For federal purposes, there was a waiver of the statute of limitations. For Massachusetts purposes, the taxpayer was entitled to an abatement through the federal change rules, which allowed a taxpayer to apply for an abatement within one (1) year of the date of notice of the final determination by the federal government.
Same-Sex Joint Filers: Impact of the Federal Defense of Marriage Act (DOMA) – Tax Years Prior to 2013:
For Massachusetts state income tax purposes, beginning on or after May 16, 2004 Massachusetts recognized the right of same-sex couples to be married. Same-sex spouses could file as married persons, and have the option of filing either Massachusetts joint returns or married filing separate returns. Massachusetts recognized valid same-sex marriages for tax periods that ended on or after May 16, 2004
If the same-sex couple were filing married filing joint in Massachusetts, then they would have been entitled to the exclusion of $500,000 provided the same-sex couple met the ownership and use rules of I.R.C. § 121.
Prior to 1998 Exclusion:
Generally, a taxpayer had the option to defer a gain on the sale of a principal residence both for federal purposes as well as for Massachusetts purposes. This applied even if the taxpayer purchased a home during the replacement period that was outside of Massachusetts.
Sales between May 6, 1997 and December 31, 1997:
For federal purposes, the exclusion provision was effective for sales after May 6, 1997. For Massachusetts purposes, however, sales between May 6, 1997 and December 31, 1997 were still subject to the former two year deferral rule and one-time exclusion provisions.
Installment Method of Reporting for Sales
For Tax Years Prior to 2010:
Interest was not charged on the deferred tax of certain installment sales.
For Tax Years Prior to January 1, 2005:
Taxpayers who elected installment sale treatment federally were not automatically entitled to equivalent treatment in Massachusetts. In order to qualify for installment sale treatment, taxpayers were required to file a separate Massachusetts installment sale election and to post security with the Commissioner if the tax deferred was at least $1,500.
Installment Sales Occurring before January 1, 1996:
If the installment sale occurred prior to January 1, 1996 and the taxpayer obtained the written approval of the Commissioner prior to the use of the installment method, the gains were taxed under the rate in place prior to January 1, 1996 which was 12% with a 50% deduction allowed for gains on the sale of capital assets held for more than one year.
Prior to December 1, 2004:
Massachusetts piggybacked the federal threshold for withholding of lottery winnings, which was $5,000.
Contributions for Open Tax Years Prior to 2008:
The Department of Revenue did not assess partners or other self-employed individuals who excluded or deducted elective contributions to 401(k) plans within the limitations set out in IRC § 402(g)(1)
Partners and other self-employed individuals who included their elective contributions in their Massachusetts adjusted gross income could apply for abatements for open tax years prior to 2008 to the extent the elective contributions were within the limitations set out in IRC § 402(g)(1).
The exclusion or deduction of matching contributions to 401(k) plans of these individuals for prior open tax years was not allowed.
Distributions Related to Contributions Made in Years Prior to 2008
With respect to distributions related to 401(k) plan contributions made in years prior to 2008, partners and other self-employed individuals had to retain records to show that contributions were not excluded or deducted, whether pursuant to an original return, amended return, abatement application, or otherwise, for Massachusetts personal income tax purposes in the years in which the contributions were made in order to substantiate any claimed deductions on account of previously taxed contributions.
403(b) Retirement Plan - TSA and TIAA-CREF
Prior to 1998:
Only mandatory contributions to a Section 403(b) retirement plan were excluded from Massachusetts gross income. The statutory provision in M.G.L. c. 62, s. 2(a)(1)(D) stipulated that voluntary employee contributions to I.R.C. § 403(b) retirement plans be added back to federal gross income to arrive at Massachusetts gross income. These contributions were subject to Massachusetts income tax and were reported on the employee's wage and tax statement (Form W-2). Distributions from the TSA whether made before or after the employee retired were exempt from tax until the amount recovered equals the total amount previously taxed (pre-1998 voluntary contributions).
457 Deferred Compensation Plan
Deferral Limit Amounts for Tax Years 1999 - 2001:
- For tax years 2001, the deferral limit was the lesser of $8,500 or 33 1/3% of the participant's compensation, and the maximum amount that could have been deferred under both normal and "catch-up" provisions was $15,000.
- For tax years 1999 and 2000, the deferral limit was the lesser of $8,000 or 33 1/3% of the participant's compensation, and the maximum amount that could have been deferred under both normal and "catch-up" provisions was $15,000.
1998 Law Change:
Effective January 1, 1998, Massachusetts adopts the federal treatment for § 457 deferred compensation plans, under the Internal Revenue Code, as amended and in effect on January 1, 1998 and automatically adopts any future changes to the federal provisions for § 457 deferred compensation plans.
Prior to 1998:
Previously, the maximum annual contribution was $7,500.
Massachusetts Police or Fire Department Pension
Prior to 1998:
The survivor annuity benefits were generally included in income except to the extent amounts were contributed by, and included in the income of, the officer at the time of contribution. If a city or town granted an annuity to an employee not entitled to a retirement allowance, it would be taxable.
Prior to 1996:
Military pensions were taxable.
|State||Treatment of Out-of-State Government Pensions|
All out-of-state government pensions qualify for the pension exemption. The exemption applies to taxpayers who are age 62 or older, or who are permanently disabled:
For tax years 2008 - 2011, the maximum exemption was $35,000;
All out-of-state government pensions qualify for the $6,000 pension exemption which is reduced by taxable and nontaxable Social Security and Railroad Retirement benefits.
Starting in tax year 2014, the exemption amount increased to $10,000
All out-of-state government pensions qualify for the pension exemption, which is first reduced by taxable and nontaxable Social Security and Railroad Retirement benefits: age 65 or older and/or totally disabled qualify for the exemption.
For tax year 2013 - the maximum exemption was $27,800;
Beginning in 2012, pension and retirement benefits were taxed differently depending on the age of the recipient:
• The law remained the same as it was prior to 2012: taxpayers born before 1946 could subtract all qualifying pension and retirement benefits received from public sources, as well as qualifying private pension and retirement benefits up to $47,309 if single or married filing separate, or $94,618 if married filing a joint return. If public retirement benefits were greater than the maximum amounts, taxpayers were not entitled to claim a subtraction for private pensions.
• Taxpayers born during the period 1946 through 1952 were able to deduct up to $20,000 in pension and retirement benefits if single or married filing separate or up to $40,000 if married filing a joint return. All pension or retirement benefits (public and private) were treated the same.
• Taxpayers born after 1952, all pension and retirement benefits were taxable and they were not entitled to a pension subtraction.
For tax years prior to 2012, Qualifying retirement and pension benefits included in AGI could be subtracted from income, and the amount that could be subtracted depended on the source of the benefit (public or private).
Qualifying retirement and pension benefits from public sources included:
• The State of Michigan
|Missouri||All out-of-state government pensions qualify for the public employee pension exemption: For tax years 2007 – 2011, married couples with Missouri adjusted gross income (excluding taxable social security benefits) less than $100,000 and single individuals with Missouri adjusted gross income less than $85,000 could deduct a percentage of their public retirement benefits to the extent the amounts were included in their federal adjusted gross income. Below is the table for percentage amount by year: |
For tax years beginning in 2012, the percentage increased to 100%
Married couples with Missouri adjusted gross income greater than $100,000 and single individuals with Missouri adjusted gross income greater than $85,000 could qualify for a partial exemption which was limited to $6,000 or a percentage of their taxable public pension, not to exceed their maximum social security benefits equal to a designated amount. Below is the table for the pension limit amounts by year:
All out-of-state government pensions qualify for the partial pension exemption adjusted for inflation every year.
For tax year 2013, the retirement exemption was limited to the lesser of taxable retirement income received or $3,900, as long as federal adjusted gross income was $32,480 or less and filing status was either single, married filing jointly if only one spouse had taxable retirement income, or head of household.
Note: If filing jointly with spouse, both with retirement income and federal adjusted gross income was $32,480 or less, both spouses could exclude the lesser of taxable retirement income which was received personally.
When federal adjusted gross income exceeded $32,480, the retirement exemption was reduced $2 for every $1 that federal adjusted gross income was over $32,480. Taxpayer was not entitled to this retirement income exemption if federal adjusted gross income exceeded $34,430 if filing single, married filing separately, or head of household; for married and filing jointly and both spouses had retirement income, it was completely phased out when federal adjusted gross income exceeded $36,380.
For tax year 2012 - limitation exemption was $3,830; adjusted gross income was $31,920;
AGI phase outs were $33,835 and $35,750.
For tax year 2011- limitation exemption was $3,760; adjusted gross income was $31,370;
For tax year 2010 - limitation exemption $3,640; adjusted gross income was $30,320;
AGI phase outs were $32,140 and $33,960.
For tax year 2009 – limitation exemption $3,600; adjusted gross income was $xx,xxx;
AGI phase outs were $31,800 and $33,600.
All out-of-state government pensions qualify for the pension exclusion: age 62 or older or disabled qualifies for the exemption; taxpayers may still be eligible for a special exclusion up to $6,000. Under NJ’s 3-Year Rule, annuities are not taxed until total employee contributions to civil service retirement have been recovered.
Note: For tax years prior to 2007 pension and other retirement income exclusions may have been eliminated for taxpayers with NJ gross income over a specified amount; these taxpayers may have been eligible for a special exclusion up to a specified amount. (amounts may have differed year to year)
All out-of-state government pensions qualify for the pension exemption of $10,000 provided modified Oklahoma Adjusted Gross Income is under certain thresholds:
For tax year 2009 - modified Oklahoma Adjusted Gross Income was $100,000 or less for single, head of household and married filing separate filers, or $200,000 or less for married filing joint filers qualified for this exemption;
For tax year 2008 - modified Oklahoma Adjusted Gross Income was $62,500 or less for single, head of household and married filing separate filers, or $125,000 or less for married filing joint filers qualified for this exemption;
For tax years 2007 - modified Oklahoma Adjusted Gross Income was $50,000 or less for single, head of household and married filing separate filers, or $100,000 or less for married filing joint filers qualified for this exemption;
|Utah||Prior to 2008, all out-of-state government pensions qualify for either pension exemption or deduction: age 65 or older could be entitled to a retirement exemption of up to $7,500; under age 65 could qualify to deduct up to $4,800 of retirement income, depending on income limitations.|
In General - Prior to 2002:
Massachusetts followed the federal provisions as of January 1, 1998. Rollovers were not allowed between traditional IRAs and employer retirement plans.
For Tax Year 2010, Tax Reporting 2010 -2012
Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) - Rollovers for Tax Year 2010:
For federal income tax purposes, the act provided a special provision for Traditional IRAs rolled over to Roth IRAs during 2010: unless a taxpayer elected to include the applicable conversion amount in gross income in 2010, none of the amount from such conversion was includible in income in 2010; half of the gross income was includible in 2011 and half in 2012.
Impact of Rollover Provision Completed in 2010 - Federal Provision:
In 2010, a taxpayer rolled over his traditional IRA to a Roth IRA. Prior to the rollover, his traditional IRA account balance was $20,000:
- $10,000 of federal deductible contributions but subject to tax for Massachusetts purposes; and
- $10,000 of accumulated earnings or appreciation.
If the taxpayer converted the traditional IRA to a Roth IRA, the $20,000 was included in federal gross income for federal income tax purposes. Unless the taxpayer elected otherwise, $10,000 of the income resulting from the conversion was included in gross income in 2011, and $10,000 was included in 2012. As an alternative, the taxpayer could have elected to include the entire $20,000 in gross income in 2010.
Impact of Rollover Provision Completed in 2010 - Massachusetts Adjustments:
Amounts in traditional IRAs previously subject to Massachusetts personal income tax were not be subject to tax when the IRA was converted to a Roth IRA. In this case, the Massachusetts previously taxed contributions of $10,000 were not taxable in Massachusetts; the $10,000 of earnings and appreciation was ordinary income and would be included in Massachusetts gross income. Unless the taxpayer had made a federal election, $5,000 of the income resulting from the conversion was included in Massachusetts gross income in 2011, and $5,000 was included in 2012. However, if the taxpayer made the federal election to include the entire federal amount in gross income in 2010, the taxpayer had to include the entire Massachusetts amount of $10,000 in gross income in 2010
Prior to 2010:
Only taxpayers with federal adjusted gross incomes of $100,000 or less could exercise the option to convert a Traditional IRA to a Roth IRA.
Ineligible Rollovers from a Traditional IRA to a Roth IRA per IRS:
Taxpayers whose federal adjusted gross income exceeded the threshold amount of $100,000 were notified that they were not eligible for this rollover. They were directed to re-characterize the conversion contributions back to a traditional IRA. Taxpayers needed to amend their federal and Massachusetts tax returns to remove the income that was originally reported once the funds had been reverted back to a traditional IRA.
For Tax Year 1998 Only - Special 4-Year Averaging Rule to Report the Income:
For partial or complete rollovers completed in 1998, the taxpayer could elect to apply the special 4 year averaging rule, whereby the taxable portion of the 1998 rollover amount was included in gross income ratably over four taxable years starting with 1998.
If a taxpayer made the special 4-tax-year averaging election for federal purposes, the election would apply for Massachusetts purposes. On the other hand, if a taxpayer did not make the 4 year election federally, then the election would not be available for Massachusetts purposes. The federal and Massachusetts treatment had to be consistent.
Four Year Averaging Election, Change in Residency - Massachusetts Resident Moved out:
If a Massachusetts resident had made the four year averaging election and subsequently changed residency during the four year period, the income received as a nonresident was excludable per Public Law 104-95 (TIR 97-2) and regulation, which exempts any distribution received by nonresidents from a qualified pension, i.e., an individual retirement account (IRA).
Four Year Averaging Election, Change in Residency - Nonresident Moved into Massachusetts:
If a nonresident had made the four year averaging election and subsequently moved to Massachusetts, the income was taxable on the amounts reportable after the time they became a Massachusetts resident because it was included in federal gross income and there was no provision to exclude it from federal gross income to arrive at Massachusetts gross income.
Savings Incentive Match Plan for Employees - SIMPLE Accounts
Prior to 1998:
The federal exclusion for SIMPLE was initially allowed for tax years beginning on or after December 31, 1996. However, per TIR 97-7, Massachusetts did not adopt the federal exclusions for contributions to a SIMPLE account since such exclusions were not in the 1988 Code. TIR 97-7 which did not allow an exclusion for contributions to a SIMPLE account has been modified by TIR 98-15 and DD 99-7.
Simplified Employee Pension Plan - SEP or SEP IRA
The Massachusetts tax treatment of SEPs, SARSEPs and SEP - IRAs related to employee contributions was unaffected by the 1998 Code update since contributions to these accounts could be deferred based on the January 1, 1988 Code. Per the U.S. Tax Reform Act of 1986, SEP's, SARSEP's and SEP - IRAs were no longer under I.R.C. Section 219 and therefore amounts could be deferred.
History of SEP:
SEPs were created by the Revenue Act of 1978; under I.R.C. § 219, employer contributions to a SEP were considered to be contributions to an IRA. For tax years beginning in 1979, employer contributions to a SEP were included in federal gross income but a certain amount could be deducted under I.R.C. § 219.
Since the contributions were included in federal gross income, the amount was included in Massachusetts gross income. For Massachusetts purposes, no deduction for contributions was allowed because Massachusetts specifically disallows any I.R.C. § 219 deduction for IRA contributions.
Under the Tax Reform Act (TRA) of 1986, the law changed, and the employer contributions were excluded from gross income effective for tax years beginning in 1987. Since Massachusetts still followed the 'Code' of 01/01/85, the old rules still applied and the SEP contributions continued to be included in Massachusetts gross income with no deduction allowed.
When Massachusetts adopted the Code as of 01/01/88, it also adopted the provisions of TRA `86, specifically provisions relating to SEP contributions. For tax years beginning on or after January 1, 1988, SEP contributions could be excluded from Massachusetts gross income to the same extent they were excluded from federal gross income.
Partial Exclusion for Tax Year 2009 - Federal Only
For federal income tax purposes, pursuant to I.R.C. § 85, individuals must include in gross income any unemployment compensation received under the laws of the U.S. or any state. The American Recovery and Reinvestment Act of 2009 (P.L. 111-5 or "ARRA") added new I.R.C. § 85(c) whereby up to $2,400 of unemployment compensation benefits received in 2009 were excluded from the gross income of the recipient.
For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. Since I.R.C. § 85 is not one of the Code sections included as an exception, Massachusetts follows I.R.C. § 85 as amended and in effect on January 1, 2005 and therefore did not adopt the new § 85(c) provision allowing an exclusion from gross income for up to $2,400 of unemployment compensation benefits received in 2009. Thus, for Massachusetts personal income tax purposes, an individual included in gross income the entire amount of unemployment compensation received in 2009.
Amounts for exclusion:
|SIMPLE IRA Governed by IRC Section 408(p)- Maximum Exclusion Amounts, And Additional Exclusion Amounts Allowed for Age 50 Catch-up Contributions|
|Tax Year||Maximum Exclusion||Additional Exclusion for Catch-up|
|2009 - 2012||$11,500||$2,500|
|2007 and 2008||$10,500||$2,500|
|Sections 401(k), 403(b), 457 plan or 408(k) SEP - Maximum Exclusion Amounts (or other applicable amount determined by federal law), and Additional Exclusion Amounts Allowed for Age 50 Catch-up Contributions|
|Tax Year||Maximum Exclusion||Additional Exclusion for Catch-up|
|2007 and 2008||$15,500||$5,000|
Before this adoption, the reference to the 1998 Code in the personal income tax at G.L. c. 62, Section 1 prevented the adoption by Massachusetts of many of the federal provisions pertaining to retirement plans.
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