Prior Year Massachusetts Income

• Capital/Ordinary Gains and Losses
  • Gains from the Sale of Principal Residence
  • Installment Method of Reporting for Sales
  • Tax Rates
• Gambling Winnings
• Pensions
  • 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
  • Rollovers
    • In General
    • IRA, Conversion of Traditional IRA to Roth IRA
  • Savings Incentive Match Plan for Employees - SIMPLE Accounts
  • Simplified Employee Pension Plan - SEP or SEP IRA
  • Workplace Retirement Plan Contributions Including "Catch-up" Contributions
    
    
• Massachusetts References

Gains from the Sale of Principal Residence

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.

Gambling Winnings

Prior to December 1, 2004:
Massachusetts piggybacked the federal threshold for withholding of lottery winnings, which was $5,000.

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.

Military Pensions

Prior to 1996:
Military pensions were taxable.

Other State's Tax Treatment of Out-of-State Employee Contributory Government Pensions

Rollovers

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. 

IRA, Conversion of a Traditional IRA to a Roth IRA 

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.

Workplace Retirement Plan Contributions Including "Catch-up" Contributions

Prior to 2002:
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.

Massachusetts References:

Capital/Ordinary Gains and Losses 

• E. Joel Peterson, et al. v. Commissioner of Revenue, 441 Mass. 420 (2004) ("Peterson I")
• E. Joel Peterson, et al. v. Commissioner of Revenue, 444 Mass. 128 (2005) ("Peterson II")
• M.G.L. c. 62, Sections 1(c), 1(m) as amended by St. 1995, c. 38, s. 65, St. 1998, c. 175 ss. 6, 7 and St. 1998, c. 319, s. 6; 2(a)(3)(B), as amended by St. 2002, c. 186 s. 5; as added by St. 1998, c. 175, s. 9; 2(b)(1)(C); 2(c)(3); 4; 6F
• TIR 05-13: Peterson v. Commissioner of Revenue; Tax Year 2002 Capital Gains Tax Rate (modified and superseded in part by TIR 05-20 )
• TIR 04-25: Effect of Recent Legislation on the Personal Income Tax, Withholding of Tax, and the Declaration of Estimated Tax by Individuals
• TIR 02-21: Capital Gains and Losses: Massachusetts Tax Law Changes
• TIR 02-18: Tax Changes Contained in
• TIR 99-17: Capital Gains and Losses: Massachusetts Law Changes Retroactive to 1996, which modifies TIR 98- 8 and TIR 97-3
• 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 97-3: Capital Gains and Losses Reporting for 1996: Forms Clarification and Errata
• DD 06-2: Supplement to TIR 05-20; Peterson Abatement Applications Involving Pass-through Entities