Below you will find brief descriptions of major tax law changes for 2006 pertaining to personal income tax in Massachusetts. Each topic includes links to further detailed information.
- 179 Expenses
- Brownfields Credit
- Business Expenses of National Guard and Reserve Members
- Claim of Right
- Commuter Deduction
- Economic Area Opportunity Credit (EOA)
- Extensions Relating to Storms and Flooding
- Film Incentive Credit
- Health Savings Accounts
- Historic Rehabilitation Credit
- Home Energy Efficiency Credit
- Home Heating Fuel Deduction
- IRA Distributions for Charitable Purposes
- Medical Devices Credit
- Medical Savings Accounts (Archer MSAs)
- Military Fringe Benefits
- Military Personnel Serving in a Combat Zone
- Nonresident Changes
- No Tax Status and Limited Income Credit
- Pensions and Retirement Plans; Contributions and Rollovers
- Personal Exemptions
- Personal Exemptions - New Rule for Tax Year 2007
- Real Estate Tax Credit (Circuit Breaker Credit)
- Retirement Planning Services
- Student Loan Interest Deduction
- Transportation Fringe Benefits
- Unlawful Discrimination Suits
Below you will find brief descriptions of federal tax law changes for 2006 that do not pertain to personal income tax in Massachusetts. Each topic includes links to further detailed information.
- Clean-Fuel Vehicles and Certain Refueling Property
- Educators' Deduction - Repealed
- Energy Efficient Improvements to Depreciable Buildings Deduction
- Tuition and Fees - Repealed
Major Tax Law Changes for 2006 Pertaining to Personal Income Tax in Massachusetts
Section 179 Expenses
Per the American Jobs Creation Act of 2004 (P.L. 108-357), effective for years beginning on or after January 1, 2006, the I.R.C. § 179 election to expense property in its initial year has increased from $105,000 ($100,000 base + $5,000 inflation adjustment) to $108,000 ($100,000 base + $8,000 inflation adjustment.) The I.R.C. § 179 overall investment phase-out-threshold has also increased from $420,000 ($400,000 base + $20,000 inflation adjustment) to $430,000 ($400,000 base + $30,000 inflation adjustment.) The inflation adjustment in I.R.C. § 179(b) was set to expire after 2005 but has been extended by the American Jobs Creation Act of 2004. Massachusetts adopts the increases in this expensing provision since I.R.C. § 179 is a trade or business expense adopted by Massachusetts on a current Code basis. For more information, see:
Per an Act Relative to Economic Investments in the Commonwealth to Promote Job Creation, Economic Stability, and Competitiveness in the Massachusetts Economy (St. 2006, c. 123), effective June 24, 2006:
- The credit is available to nonprofit organizations;
- The time frame for eligibility for the credit has been extended; and
- Credits may be transferred, sold or assigned to another taxpayer with a liability.
Under prior law, environmental response and removal costs incurred between August 1, 1998 and August 5, 2005, were eligible for the credit, provided that taxpayer commenced and diligently pursued an environmental response action before the deadline of August 5, 2005. As a result of recent legislation, the environmental response action commencement cut-off-date is changed from August 5, 2005 to August 5, 2011, and the time for incurring eligible costs that qualify for the credit is extended to January 1, 2012. For more information, see:
Business Expenses of National Guard and Reserve Members
Massachusetts continues to adopt the federal treatment under the Internal Revenue Code, as amended and in effect on January 1, 2005, for unreimbursed overnight travel, meals and lodging expenses of National Guard and Reserve Members who must travel more than 100 miles from home to perform services as a National Guard or reserve member. For more information, see:
Claim of Right
For tax years beginning on or after January 1, 2005, taxpayers who have paid Massachusetts personal income taxes in a prior year on income attributed to them under a "claim of right" may deduct such amounts of that income from their gross income if it is later determined that they:
- were not in fact entitled to the income, and
- have repaid the amounts in question.
The deduction is allowed in the year of repayment, provided:
- the amount was previously included in Massachusetts taxable income; and
- the repayment is not otherwise deductible in determining Massachusetts income. Because Massachusetts already allows for certain deductions under I.R.C. §§ 62 (relating to trade or business expenses) and 404 (without regard to § 265), the claim of right deduction may be taken only if amounts repaid were not otherwise deductible.
- tolls paid through the Massachusetts FastLane account; and
- the cost of weekly or monthly passes for MBTA transit, bus, commuter rail or commuter boat.
Extensions Relating to Storms and Flooding
Recognizing that there has been disruption for many individuals and businesses as a result of power outages and public transportation problems associated with the Northeastern storm of April 16, 2007, affected taxpayers with tax returns or payments due April 17, 2007 will be granted an extension to file and to pay until April 26, 2007. This extension covers the filing of tax returns, the payment of tax (including payment of estimated tax), and the filing of tax extension forms with DOR. During the time of this extension, no interest or penalties will accrue. However, this extension of time does not affect tax deficiencies existing prior to April 17th nor does it apply to claims for abatement, making elections, the filing of any other tax documents with DOR, or filings with the Appellate Tax Board or tax appeals filed with Massachusetts Courts.
Affected taxpayers are any taxpayers directly impacted by the storm, as determined by the Internal Revenue Service. See IRS Release IR-2007-92.
Affected taxpayers seeking an extension to April 26, 2007 should mark the top of any affected returns, extension forms, payment vouchers or depository slips in red ink with the following notation: "April 16 Storm" and attach a separate sheet of paper containing a brief explanation of why they are an affected taxpayer. Taxpayers filing electronic returns or using the Department's Telefile program should continue to file in such manner and should contact the Department at (617) 887-MDOR if they receive penalties for filing returns or paying taxes late. For more information, see:
Film Incentive Credit
Per Chapters 158 and 167 of the Acts of 2005, for taxable years beginning on or after January 1, 2006 and before January 1, 2013, motion picture production companies may claim two different tax credits against either their personal income tax or corporate excise liabilities: payroll credit and production expense credit. Each credit has its own qualification requirements and taxpayers may qualify for and claim both credits; however, the total amount of tax credits allowed to any one motion picture shall not exceed $7,000,000.
The credits may be used or transferred by any taxpayer, including financial institutions, utility corporations and insurance companies, and by corporations that are exempt from taxation under I.R.C. § 501. Insurance companies may apply the credit against the insurance premiums tax. Corporations that are exempt from tax under I.R.C. § 501 may apply the credit against the tax on unrelated business income. Flow-through entities may pass the film credits through to partners, members or owners in proportion to their sharing of other tax or economic attributes of the entity. The credits are nonrefundable. For more information, see:
Health Savings Accounts
For tax years beginning on or after January 1, 2005, Massachusetts adopts the federal deduction allowed to individuals for contributions to a Health Savings Account, subject to federal limitations which are adjusted annually for inflation. Health Savings Accounts (HSAs) are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. For calendar year 2006, the maximum annual aggregate contribution is equal to the lesser of the health plan's annual deductible, or $2,700 for an individual plan or $5,450 for a family plan.
The contribution limitations are increased for individuals age 55 or older (but not covered by Medicare) by the end of the calendar year. For calendar year 2006, the maximum annual aggregate contribution for an individual age 55 or older is equal to the lesser of the health plan's annual deductible, or $3,400 for an individual plan or $6,150 for a family plan.
Per the Tax Relief and Health Care Act of 2006 (P.L.109-432), Massachusetts adopts the changes to the provision allowing rollovers from Flexible Savings Accounts and Health Reimbursement Accounts into HSAs as of September 21, 2006. For more information, see:
Historic Rehabilitation Credit
An Act Relative to Economic Investments in the Commonwealth to Promote Job Creation, Economic Stability, and Competitiveness in the Massachusetts Economy (St. 2006, c. 123), effective June 24, 2006, extends the time period and increases the amount of the Historic Rehabilitation Credit. Under prior law, the credit was available from January 1, 2005 to December 31, 2009, and was limited to $15,000,000 per year. As a result of the Act, credit availability is extended through December 31, 2011, in an amount not to exceed $50,000,000 per year. The credit is also transferable. For more information, see:
Home Energy Efficiency Credit
Subject to certain limitations, taxpayers and entities that are owners of residential properties located in Massachusetts may claim a credit in the amount of the net expenditures for the purchase and installation of energy-efficient heating items in such properties. Qualified purchases include energy-efficient heating items purchased on or after November 1, 2005 but not later than March 31, 2006, and costs related to the installation of such energy-efficient heating items in residential property located in Massachusetts.
Energy-efficient heating items include:
- home insulation;
- new window installation;
- advanced programmable thermostats;
- fuel efficient furnaces, boilers, oil, gas, propane, or electric heating systems;
- solar domestic hot water systems;
- materials for insulation or sealing of a duct, attic, basement, rim joint or wall;
- pipe insulation for heating systems; and
- any energy-efficient item similarly related to heat conservation (as opposed to some other type of energy-efficient items.)
Home Heating Fuel Deduction
Certain owners and renters of residential property located in Massachusetts may claim a home heating fuel deduction up to a maximum of $800 for the cost of home heating oil, natural gas, and propane purchased between November 1, 2005 and March 31, 2006. A taxpayer who qualifies for the deduction may apply the deduction in taxable year 2005 for purchases made between November 1, 2005 and December 31, 2005. If the taxpayer does not take the full $800 deduction in taxable year 2005, the taxpayer may take the remainder in taxable year 2006 for purchases made in between January 1, 2006 and March 31, 2006.
The deduction is available to single persons whose adjusted gross income is $50,000 or less; and joint filers and heads of household filers whose adjusted gross income is $75,000 or less. For more information, see:
IRA Distributions for Charitable Purposes
The Pension Protection Act of 2006, (P.L. 109-280) provides for an exclusion from federal gross income for distributions from traditional and Roth IRAs to qualified charities that would otherwise be taxable income.
The exclusion applies to:
- distributions made on behalf of taxpayers who are at least 70 ½ on the date of distribution in 2006 or 2007;
- distributions made up to a maximum of $100,000 per year; and
- traditional and Roth IRAs.
The exclusion does not apply to Simplified Employee Pension plans, SIMPLE plans, Keoghs, or any other retirement plan such as an I.R.C. § 401(k), 403(b), defined benefit or contribution plan or profit sharing plan.
Medical Devices Credit
Per Chapters 144 and 145 of the Acts of 2006, a credit is available to G.L. c. 63 and c. 62 medical device companies that develop or manufacture medical devices in Massachusetts and is equal to 100% of the user fees paid by them when submitting certain medical device applications and supplements to the United States Food and Drug Administration ("USFDA"). The credit is transferable. For more information, see:
Medical Savings Accounts (Archer MSAs)
Archer MSAs are tax-exempt trusts or custodial accounts to which tax-deductible contributions may be made by individuals with a high deductible health plan. In addition, employer contributions made on behalf of the employee are excludable from the employee's gross income. The Tax Relief and Health Care Act of 2006 (P.L.109-432) extends the Archer MSA provisions for two years, through December 31, 2007, thereby allowing employers and employees to establish and contribute to new MSAs in 2006 and 2007. Since DOR follows the Code as of January 1, 2005, and these provisions were enacted into the Code after January 1, 2005, DOR does not adopt the extension to establish and contribute to new MSAs.
Under the January 1, 2005 Code, the Archer MSA provisions contained a sunset date of December 31, 2005 that grandfathered in prior participants and provided that after December 31, 2005, contributions would be allowed by or on behalf of individuals who previously made (or had made on their behalf) Archer MSA contributions and employees who are employed by a participating employer. Since DOR follows the provisions of the Code as of January 1, 2005, deductions are allowed for MSAs established prior to January 1, 2006, including any inflation adjustments to the limits and maximums for deductibles. For more information, see:
Military Fringe Benefits
Under the January 1, 1998 Code, Massachusetts allowed the federal exclusion for certain military fringe benefits including combat zone compensation, veterans' and medical benefits, disability benefits, moving allowances and a death gratuity benefit of $3,000. As a result Code update, Massachusetts adopts the federal exclusion as amended and in effect on January 1, 2005, that extends the exclusion to include dependent care assistance under a dependent care assistance program, travel benefits received under the Operation Hero Miles program and an increased death benefit gratuity of $12,000. The Operation Hero Miles program provides, through public and air and surface carriers, domestic travel for military personnel and their families through donated frequent flyer miles, tickets or ticket vouchers. For more information, see:
Military Personnel Serving in a Combat Zone
Compensation received for active service in a combat zone by members of the armed forces of the United States is excluded from Massachusetts gross income. Income earned for active service for any month during which a member below the grade of commissioned officer served or was hospitalized as a result of injuries received during service in a combat zone is excluded from gross income; a portion of such income earned by commissioned officers is also excluded. Designated combat zones include/have included: the Persian Gulf, Kosovo and Afghanistan.
Massachusetts gross income is based on federal gross income. Massachusetts adopts the Internal Revenue Code as of January 1, 1998. Since the relevant federal provisions were enacted before January 1, 1998, Massachusetts excludes from income, to the same extent as the Code, compensation earned by members of the armed forces for service in a combat zone. For more information, see:
TIRs 03-8, 02-4 and 99-6
No Tax Status and Limited Income Credit Thresholds:
Because the income level for No Tax Status for joint filers and heads of household is based in part on the personal exemption amounts, the threshold for No Tax Status for these taxpayers has been changed to reflect changes to the personal exemptions. The Limited Income Credit calculation is similarly affected.
- Joint Filers.
No tax is imposed if the Massachusetts adjusted gross income (AGI) does not exceed $15,300 plus $1,000 per dependent. Joint filers are eligible for the Limited Income Credit if Massachusetts AGI does not exceed $26,775 plus $1,750 per dependent.
- Head of Household.
No tax is imposed if the Massachusetts AGI does not exceed $13,550 plus $1,000 per dependent. Heads of household are eligible for the Limited Income Credit if Massachusetts AGI does not exceed $23,713 plus $1,750 per dependent.
- Single Filers.
No Tax Status for single filers is unaffected by the increase in the personal exemption amount. For single filers, no tax is imposed if the taxpayer 's Massachusetts AGI does not exceed $8,000. Single filers are eligible for the Limited Income Credit if Massachusetts AGI does not exceed $14,000.
Note: If married filing separately, you do not qualify for No Tax Status or the Limited Income Credit.
Massachusetts source 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, whether or not the non-resident is actively engaged in a trade or business or employment in Massachusetts in the year in which the income is received; 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. All types of income, including investment income, derived from or effectively connected with the carrying on of a trade or business within Massachusetts are Massachusetts source income. The term may include gain from the sale of a business or of an interest in a business, distributive share income, separation, sick or vacation pay, deferred compensation and nonqualified pension income not prevented from state taxation by the laws of the United States, and income from a covenant not to compete. For more information, see:
830 CMR 62.5A.1
Pensions and Retirement Plans; Distributions and Rollovers
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") has made the following Internal Revenue Code (Code) provisions relating to qualified plans and other tax-favored retirement plans:
- increases the federal income tax contribution limits for elective deferrals;
- provides catch-up contributions for those age 50 or older;
- increases portability between plans and accounts by expanding the rollover provisions; and
- makes several other changes related to retirement plans and accounts.
Under the Act, Massachusetts retains the reference in chapter 62 to the 1998 Code for most income tax provisions, but adopts the current Code for the treatment of qualified plans and certain other tax-favored retirement plans. Effective for tax years beginning on or after January 1, 2002, the Act conforms the Massachusetts personal income tax to the following sections of the Code as amended and in effect for the taxable year ("current Code"): I.R.C. §§ 62(a)(1),72, 274(m) and (n), 401 to 420 inclusive (but excluding §§ 402A and 408q), 457, 529, 530, 3401 and 3405. For more information, see:
Recent legislation provides that personal exemptions may increase for tax years beginning on or after January 1, 2004 if tax revenues increase. Applicable for the 2006 tax year, the personal income tax exemptions have increased from $3,575 to $3,850 for single and married filing separately filers, from $5,525 to $5,950 for head of household filers, and from $7,150 to $7,700 for joint filers. For more information, see:
Personal Exemptions - New Rule for Tax Year 2007
The Health Care Reform Act of 2006 requires all (with few exceptions) Massachusetts residents 18 and over to carry health insurance as of July 1, 2007. Failure to show proof of coverage in effect December 21, 2007 will result in loss of personal exemptions when filing the 2007 personal income tax return next year.
Real Estate Tax Credit for Persons Age 65 and Older (Circuit Breaker Credit)
Certain taxpayers age 65 or older may be eligible to claim a refundable credit on their state income taxes for the real estate taxes paid during the tax year on the residential property they own or rent in Massachusetts that is used as their principal residence. If the credit due the taxpayer exceeds the amount of the total income tax payable for the year by the taxpayer, the excess amount of the credit will be refunded to the taxpayer without interest. For tax year 2006, the maximum credit allowed for both renters and homeowners is $870.
To be eligible for the credit for the 2006 tax year: the taxpayer or spouse, if married filing jointly, must be 65 years of age or older at the close of the 2006 tax year; the taxpayer must own or rent residential property in Massachusetts and occupy the property as his or her principal residence; the taxpayer's "total income" cannot exceed $46,000 for a single filer who is not the head of a household, $58,000 for a head of household, or $70,000 for taxpayers filing jointly; and for homeowners, the assessed valuation as of January 1, 2006, before residential exemptions but after abatements, of the homeowner's personal residence cannot exceed $684,000. For more information, see:
Retirement Planning Services
As a result of Code update, Massachusetts adopts the federal exclusion for the employee fringe benefit of retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan. Qualified employer plans include I.R.C. § 401(a) plans, annuity plans, government plans, I.R.C. § 403(b) annuity contracts, SEPs and SIMPLE accounts. This exclusion is due to expire for tax or plan years beginning after December 31, 2010. For more information, see:
Student Loan Interest Deduction
A deduction is allowed for interest paid by the taxpayer, up to an annual maximum of $2,500, for a qualified education loan for graduate or undergraduate education, subject to taxpayer income limitations.
Under IRS Rev. Proc. 2005-70, there was no inflation adjustment for the 2006 tax year. The modified adjusted gross income limits for the deduction are adjusted only in the event the inflation calculation results in an increment of at least $5,000. I.R.C. § 221(f). We would adopt any inflation adjustment under this provision given the inflation formula in the January 1, 2005 Code. For more information, see:
Transportation Fringe Benefits
As a result of Code Update, for tax years starting on or after January 1, 2005, Massachusetts adopts the federal exclusion without any differences in exclusion amounts or allowed benefits. The Massachusetts exclusion amounts for tax year 2006 are $205 per month for employer-provided parking and $105 per month for employer-provided vanpool and transit pass benefits combined, including transit pass and employer-provided vanpool benefits that are a reduction in salary. For more information, see:
Unlawful Discrimination Suits
Massachusetts continues to adopt the federal deduction allowed for attorney fees and court costs paid to recover a judgment or settlement for a claim of unlawful discrimination, up to the amount included in gross income for the tax year from such claim.
Major Federal Tax Law Changes for 2006 That Do Not Pertain to Personal Income Tax in Massachusetts
Clean Fuel Vehicles and Certain Refueling Property
Under the January 2, 2005 Code, the federal deduction is due to expire for tax years after December 31, 2006. The Energy Policy Act of 2005 (P.L. 109-58) replaced the clean-fuel burning deduction with a tax credit for hybrid vehicles effective for vehicles purchased or placed in service on or after January 1, 2006. This Act changed the expiration for the deduction from December 31, 2006 to December 31, 2005. However, given the change in the effective date was not part of the January 1, 2005 Code, DOR continues to adopt the Deduction for Clean-Fuel Vehicles for the 2006 tax year. For more information, see:
For tax years beginning on or after January 1, 2006, the Educator's Deduction has been repealed. Even if Congress extends this deduction, DOR will not adopt the extension because it will occur 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 deduction was due to expire for tax years beginning after December 31, 2005. For more information, see:
Energy Efficient Improvements to Depreciable Buildings Deduction
The Energy Policy Act of 2005 added this deduction for federal purposes. DOR does not adopt this deduction given it was enacted after January 1, 2005, and further, it is not a trade or business deduction per I.R.C. § 62(a).
Tuition and Fees Deduction
For tax years beginning on or after January 1, 2006, the Tuition and Fees Deduction has been repealed. Even if Congress extends this deduction, DOR will not adopt the extension because it will occur 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 deduction was due to expire for tax years beginning after December 31, 2005.
Note that Massachusetts continues to allow its own college tuition deduction for tuition payments paid by the taxpayer, on behalf of the taxpayer or the taxpayer's dependent, to a qualifying two- or four-year college leading to an undergraduate or associate's degree, diploma or certificate. For more information, see: