Tax Years 2012 and 2013

M.G.L. Chapter 62, Section 4, establishes the personal income tax rates to be applied against different classes of Massachusetts taxable income. The tax rate on most classes of income is scheduled to decrease in years where the state achieves revenue growth benchmarks set forth by formula in M.G.L. Chapter 62, Section 4(b).

Accordingly, for tax years 2012 and 2013, the 5.3 percent tax rate on most classes of taxable income was decreased to 5.25 percent. The tax rate on short-term gains from the sale or exchange of capital assets and on long-term gains from the sale or exchange of collectibles (after a 50 percent deduction) remained at 12 percent. 


2002 Law Change for Tax Years 2002 – 2011 (TIR 02-18)

Per Chapter 186 of the Acts of 2002, An Act Enhancing State Revenues ("the Act"), for tax years beginning on or after January 1, 2002, the Massachusetts tax rate on Schedule B interest and dividend income, as well as Form 1, Line 10 or 1-NR/PY, Line 12 income remained at 5.3%.The scheduled tax rate reduction from 5.3% to 5.0% in 2003 had been repealed and based on economic conditions, the tax rate on Schedule B interest and dividend income, as well as Form 1, Line 10 or 1-NR/PY, Line 12 income remained at this rate.


2005 Change for 2002 Capital Gains Transactions (Peterson) (TIR 02-18, 02-21, 04-25 and 05-13)

2002 Capital Gains Transactions Reported between May 1, 2002 and December 31, 2002:
In Peterson v. Commissioner of Revenue (" Peterson II "), the Supreme Judicial Court concluded that the new long-term capital gains tax rate of 5.3% was effective January 1, 2002. However, 2005 legislation delayed the effective date of the 2002 capital gains tax rate increase in a manner that complied with the Peterson II decision.

Long-Term Capital Gains Tax Rates:

  • the new capital gains tax rate increase to 5.3%, generally applicable to long-term capital gains took effect for tax years beginning on or after January 1, 2003;
  • the lower capital gains tax rates that existed during the first four months of 2002 (5% ranging down to 0% depending on the holding period) were applicable to the entire 2002 tax year, i.e., a tax year beginning on or after January 1, 2002 and prior to January 1, 2003.

Recalculation of Tax (applies to Forms 1, 1 NR/PY, 2, 3F, and 3M):

  • Taxpayers with capital gains transactions reported for the period between January 1, 2002 and April 30, 2002 did not owe tax at the increased rate of 5.3%. Taxpayers who received a preliminary tax bill (i.e., Notice of Intent to Assess) attributable to the Peterson case were instructed to disregard the notice;
  • The Department issued automatic refunds to taxpayers who paid additional tax and interest as a result of a Peterson Notice of Intent to Assess, to the extent of any overpayment;
  • Taxpayers with capital gains transactions reported for the period between May 1, 2002 and December 31, 2002 who overpaid their Massachusetts personal income taxes were eligible for refunds. All long-term capital gains and losses recognized for tax year 2002 were netted for the entire year.
  • The amount of the overpayment for net capital gain transactions that occurred between May 1 and December 31, 2002 depended on the rate of tax (ranging from 5% down to 0%) that had to be recalculated on such net capital gains (previously taxed at 5.3% on the 2002 return). Because the lower rates (5% ranging down to 0%) were based on holding periods of assets sold, taxpayers had to provide such holding periods for each capital asset that was sold between May 1 and December 31, 2002.

Special Abatement Procedures:
The Department established procedures for taxpayers affected by the law change who were eligible for refunds for tax paid on gains realized in the last eight months of 2002. Affected taxpayers had to follow the special abatement procedure under the terms of the 2005 law change.

Holding Periods for Capital Assets:
Because the lower rates (5% ranging down to 0%) were based on the holding periods, taxpayers had to provide the holding period for each capital asset that was sold after April 30, 2002.

Mutual fund shareholders had to provide the holding periods applicable to any capital gains distributions made by mutual funds. Where a mutual fund did not provide its shareholders with the relevant holding periods for the capital gains that were realized by the fund and reflected in a capital gains distribution, the entire amount of the capital gain distribution was considered 5% gain.

Period for Filing Special Abatement Applications:
Taxpayers had to apply for abatement of the overpayment of tax on long-term capital gains on or before June 30, 2006, within three years from the due date for such return, determined without regard to extensions, within two years from the date of assessment or deemed assessment of such tax on long-term capital gains, or within one year of the date of payment of such tax on long-term capital gains, whichever was later.

Overpayments were refunded :

  • without interest; and
  • in four annual installments, substantially equal in amount unless the refund is $1,000 or less, in which case the Department refunded payments to a taxpayer that totaled $1,000 or less in a single lump sum, without interest.

Impact of the Two Peterson Cases:

  • Peterson I Litigation (2002 Law Change):
    Legislation set May 1, 2002 as the effective date for increasing the rate of taxation to 5.3% for long-term capital gains from sales or exchanges occurring on or after that date. Subsequently, the Supreme Judicial Court held that the May 1, 2002 effective date violated article 44 of the Amendments to the Massachusetts Constitution. In the first Peterson case (Peterson 1), the Court ruled that the uniformity requirement of article 44 requires that "a single tax rate must be applied to income from the same class of property received during the period specified by the legislature for measuring income." May 1, 2002, was stricken as the effective date, and the case was remanded for a determination of whether the effective date of the rate change should be January 1, 2002, or January 1, 2003.

    Before the Peterson I litigation was concluded, the Legislature enacted a second set of provisions to shift the effective date for the tax rate change back to January 1, 2002. However, the law also provided that the Commissioner of Revenue would not adjust the tax liability with respect to capital gains for the period January 1, 2002 to April 30, 2002 for any taxpayer who, before the effective date of the legislative change, had paid that liability in full for capital gains realized between January 1, 2002 and April 30, 2002, inclusive.

  • Peterson II Litigation (2005 Law Change):
    in Peterson II, the Supreme Judicial Court ruled that the new capital gains tax rate of 5.3% is effective January 1, 2002. In reaching its decision, the Court considered the legislative history, including the "fiscal crisis" that in part prompted the original legislation. The Court concluded, among other things, that it would be illogical, given those circumstances, for the Legislature to pass a tax increase but delay its implementation until the next year, January 1, 2003. However, the court noted that it is "within the legislature's power to amend the Act yet again, if it wishes, to set the effective date at Janaury1, 2003."

2001 Change for 2001 - 2003 Tax Rates (TIR 01-18)

The Massachusetts tax rate on Schedule B interest and dividend income, as well as on Form 1, Line 10 or 1-NR/PY, Line 12 income were as follows:

  • for the calendar year beginning January 1, 2001: 5.6%;
  • for the calendar year beginning January 1, 2002: 5.3%;
  • for tax years beginning on or after January 1, 2003: 5.0%.

This TIR modifies TIR 99-19. The personal income tax rates for similar income as published in TIR 99-19 are no longer in effect.


1999 Change For 2000 - 2002 Tax Rates (TIR 99-19)

Starting with tax year 2000, the Massachusetts tax rate on Schedule B interest and dividend income as well as Form 1, Line 10 or 1-NR/PY, Line 12 income was reduced as follows:

  • January 1, 2000 the rate was reduced from 5.95% to 5.85%;
  • January 1, 2001 the rate was reduced from 5.85% to 5.60%;
  • January 1, 2002 the rate was reduced from 5.60% to 5.30%.

1998 Change for Form 1 and Schedule B Interest and Dividends, Effective 1999 - Same Tax Rates (TIR 98-8)

Effective January 1, 1999, the Massachusetts tax rate on Schedule B interest and dividend income was the same as the tax rate on Form 1, Line 10 or 1-NR/PY, Line 12 income.


1999 Change for 1998 - 2002 Capital Gain Distribution Holding Periods

Holding period for capital gain distributions received from a mutual fund were taxed at a rate of 5 percent unless the fund could clearly identify both the holding period and the date of distribution. For those identified by the mutual fund, taxpayer would then breakdown the gain into the 5% - 0% rates.


Taxpayer Advisory:
Taxpayers were instructed to contact their brokerage firm to get a breakdown of the capital gain distribution holding periods. Most Massachusetts firms had the breakdown. For out of state brokerage houses, the taxpayer was still advised to attempt to get a breakdown of the holding periods.


1999 Change for 1996 - 1998 Tax Years Calculation of Tax on Interest, Dividends and Capital Gains Retroactive to 1996 (CGT) (TIR 99-17)

Recent legislation made changes to the calculation of tax on interest, dividends and capital gains. These changes were retroactive to 1996.

If any of the following changes reduced the amount of tax for years 1996 - 1998, taxpayers could recalculate their tax for the prior years:

  • short-term losses were deductible against long-term capital gains;
  • long-term capital losses reduced Part A (Schedule B) interest and dividends, in addition to capital gains;
  • allowable excess Part B (Form 1 or Form 1-NR/PY) Trade or Business deductions reduced long-term gains up to the amount of Part C (Schedule D) income effectively connected with a taxpayer's trade or business;
  • lower rate capital losses fully offset higher rate capital gains;
  • the conversion of unused long-term losses to a credit was eliminated.


Under the old law, which was retroactively repealed for tax years 1996-1998, certain deductions were not allowed. However, the new law allowed taxpayers to recalculate their prior tax liability to derive a tax benefit from the new legislation. Taxpayers had the option to file for an abatement for the recalculated prior tax year, or they could take the tax benefit as a credit on their 1999 return. Any unused portion of the credit was refunded or applied to the taxpayer's estimated tax for tax year 2000.


Requirement to Recalculate More than One Year:
If a taxpayer recalculated tax for one year and the taxpayer had already filed a return for a succeeding year, the taxpayer had to recalculate for that succeeding year, if it had been changed by the previous year. For example, a taxpayer recalculated the tax for one year by deducting short-term losses against long-term gains. The taxpayer had to delete the short-term loss carryover from any succeeding year and had to recalculate any succeeding year which had used the short-term loss carryover.

If the difference in the amount of tax previously paid and the amount of tax calculated under the new provisions resulted in a tax benefit, taxpayers could either:

  • apply for a refund of the difference; or
  • claim the difference as a credit on the succeeding years tax returns.


If the result of the succeeding year recalculation was:

  • an additional tax due, it was applied to any previous year overpayment;
  • still an overpayment, the net amount was issued to the taxpayer either as a refund or credit.


Note: any unused portion of the credit claimed on the 1999 tax return could be refunded or applied to the taxpayer's estimated tax for the tax year 2000.

Schedule CGT booklet:
This booklet contained the following schedules that were necessary to recalculate the tax under the new provisions:

  • Schedule CGT - Capital Gains Tax Recalculation, which was used to calculate the difference between the tax previously paid and the amount of tax due under the new provisions. It was also used to claim the difference in tax due as a refund or credit on the succeeding years tax return;
  • 1996, 1997 and 1998 Schedule B - CGT - 12% Income - Interest Dividends and Certain Capital Gains;
  • 1996, 1997 and 1998 Schedule C-2 - CGT - Excess Deductions against Trade or Business Income;
  • 1996, 1997 and 1998 Schedule D - CGT - Capital Gains and (Losses).


Schedules CGT was used:

  • to recalculate the tax paid on interest, dividends and capital gains for previously filed 1996, 1997 and/or 1998 tax returns;
  • to adjust any changes to deductions, credits and tax due to the recalculation of tax on interest, dividends and capital gains for previously filed 1996, 1997 and/or 1998 tax returns;
  • to file original 1996, 1997 and 1998 tax returns with interest, dividend and/or capital gains based on the legislative changes stated above.


Who could not use CGT?
Those taxpayers who were reporting other changes not related to the recalculation of tax on interest, dividends and capital gains had to use either a Form CA-6 - Application for Abatement or a Form CA-6 - Massachusetts Amended Individual Income Tax Return.

Deadline for Recalculation of Previous Tax Years:
Taxpayers who chose to recalculate had to do so within the statute of limitations for abatements, for each tax year recalculated regardless of whether a refund, credit or abatement is chosen for the tax benefit for that particular year.

However, taxpayers who chose to recalculate their prior tax years' capital gains and to claim their tax benefit as a credit on their 1999 tax returns, had to do so within the statute of limitations for their 1999 tax return. For example, taxpayers who recalculated their capital gains tax on their 1996 tax return and claimed any resulting tax benefit as a credit on their 1999 tax year had to do so even if they filed for extension. The capital gains tax credit was treated as a 1999 tax credit, regardless of the fact that it was generated from a 1996, 1997 or 1998 recalculation of capital gains. The credit was claimed on line 36 of the 1999 Massachusetts Form 1 (or line 41 of the Form 1-NR/PY).


Prior to 1999 -Schedule B Interest and Dividend Rates (12%)

The tax rate for dividends and interest (Part A taxable income), other than from Massachusetts banks, was 12%. TIR 98-8 required that Schedule B deductions and exemptions be allocated on a prorated basis once the reduced rate for interest and dividends took effect. This method of prorating was inconsistent with the new capital gains legislation, and had been repealed by TIR 99-17.


Prior to 1998 - Capital Gains Distributions Reported on Schedule B and D

Gross dividends were reported on both U.S. Schedule B, Line 5 and Massachusetts Schedule B, Line 2. Capital gain distributions were then deducted out on U.S. Schedule B, Line 7 and Mass. Schedule B, Line 5. These amounts were then taxed as long-term capital gains on U.S. Schedule D, Line 14 and Massachusetts Schedule D, Line 1.

If a U.S. Schedule D was not filed, the capital gain distributions were reported on Massachusetts Schedule D, Line 1.


1996 Law Change - Capital Gains Rates (5% - 0%) (830 CMR 62.4.1; TIR 97-3)
 

  • Effective for tax years beginning on or after January 1, 1996, Capital gain income was divided into two categories, Part A and Part C Income:
    • Part A income taxed on Schedule B at 12% consisted of short-term capital gains and losses (including collectibles) and long-term gains on collectibles and pre-1996 installment sales.
    • Part C income taxed on Schedule D at varying rates (5% - 0%) consisted of all long-term capital gains and losses including long-term capital losses on collectibles. The tax rate depended on the holding period of the asset sold and was taxed according to the holding period and table below.

  • For purposes of determining the length of time a capital asset was held, the Massachusetts holding period was generally the same as the holding period determined for federal tax purposes. However, for Massachusetts purposes, a capital asset acquired before January 1, 1996, was deemed to have been acquired on the later of (i) January 1, 1995 or (ii) the date of actual acquisition.
  • Part C income taxed on Schedule D at varying rates (5% - 0%):
    For tax periods beginning January 1, 1996 through December 31, 2002. Gains consisted of all long-term capital gains and losses including long-term capital losses on collectibles. The tax rate depended on the holding period of the asset sold and was taxed according to the table below:

Tax Year BeginningCapital Asset Holding Period in YearsTax Rate and Income ClassMassachusetts Schedule D
1996more than 1, but less than/equal to 25%; Class 'B'Column A
1997more than 2, but less than/equal to 34%; Class 'C'Column B
1998more than 3, but less than/equal to 43%; Class 'D'Column C
1999more than 4, but less than/equal to 52%; Class 'E'Column D
2000more than 5, but less than/equal to 61%; Class 'F'Column E
2001more than 6 years0%; Class 'G'Column F

 

  • The following deductions were disallowed prior to the 1999 law change that allowed these deductions retroactively for tax years 1996 - 1998:
    • short-term capital losses could not be deducted from long-term capital gains;
    • long-term capital losses could not be deducted from Part A interest and dividends;
    • allowable excess Part B Trade or Business deductions could not reduce long-term gains up to the amount of Part C income effectively connected with a taxpayer's trade or business;
    • due to the Part C credit system, long-term capital losses did not always fully offset long-term capital gains;
    • unused long-term losses were converted to a credit for carryover to the next year.

Prior to 1996 - Capital Gains Rates (12%)

All capital gains were taxed at 12%, and a 50% deduction was allowed for gains on the sale of capital assets held for more than one year.