Overview
Pension contributions - Amounts you or your employers on your behalf paid into funds. Those with IRAs also make contributions.
Pension distributions - Payments you receive from an employer-funded retirement plan for past services. Those with IRAs also receive distributions
Massachusetts previously taxed contributions - Contributions for which a Massachusetts deduction was not allowed at the time you contributed to certain retirement savings accounts such as an IRA account.
Individual Retirement Account (IRA) - A retirement plan you can annually contribute a maximum amount to. For joint filers, each may contribute up to the maximum allowable amount. Total earnings are tax-free on IRA contributions and distributions may or may not be taxable depending on the type of IRA, Traditional or Roth.
Employee retirement plan - Employers who want to provide retirement benefits for employees create a pension, profit-sharing or stock bonus plan that qualifies for preferential tax treatment. This includes:
- Tax exemption for the fund created to provide benefits
- Deductions by the employer for contributions to the fund
- Employee tax deferral for the employer's contributions and earnings
- Favorable tax treatment of distributions (in some cases)
403(b) TSA and TIAA-CREF retirement plans
Generally, 403(b) retirement plans cover employees of:
- Universities
- Tax-exempt or non-profit organizations
- Local governments
Two types of 403(b) plans are:
- Tax-Sheltered Annuity Plan (TSA)
- Teacher's Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF)
There are 2 types of contributions to these plans:
- Voluntary contributions are payments made to a plan in which you agree to a reduced salary and your employer agrees to turn over this amount and an additional amount equal to a percentage of your salary. Both amounts paid are considered employer contributions if they're made while following a salary reduction agreement and aren't required under an employer's retirement program.
- Mandatory contributions are payments made to a retirement benefit plan that are required to be made by an employee usually during a trial work period.
As a Massachusetts employee:
- Contributions you and your employer to a 403(b) plan are excluded from your gross income in the year you contributed, whether they are mandatory or voluntary contributions. See the "Current year exclusion amounts" table listed below.
- Income you earned on the contributions while in the 403(b) plan is excluded from gross income.
- Distributions made to you from the 403(b) plan are excluded from gross income if such distributions represent Massachusetts previously taxed contributions. Distributions in excess of Massachusetts previously taxed voluntary contributions before January 1, 1998 are taxable.
FICA amounts related to excludable 403(b) contributions may not be deducted since the FICA relates to income not taxed in Massachusetts. This is similar to how Massachusetts treats Social Security benefits - the benefits are excludable and no FICA deduction is allowed.
Special "catch-up" provision
A limited "catch-up" provision allows those in their last 3 years before reaching normal retirement age to hold over larger amounts, as long as the full amount has not been used in previous years.
Federal employee contributory pension
Federal employee pensions are contributory annuity, pension, endowment, or retirement funds of the United States government. Federal employee contributory pensions include U.S. Postal Service pensions. These pensions which are paid to surviving spouses are also tax exempt.
As an employee:
- Contributions you made to a federal employee contributory plan are included in both federal and Massachusetts gross income.
- Income you earned on the contributions while in a federal employee contributory plan is excluded from gross income.
- Distributions made to you from a federal employee contributory plan are excluded from Massachusetts gross income.
- For federal purposes, any amount of distribution representing previously taxed contributions is excluded. However, distributions above previously taxed contributions are included in federal gross income.
Special "catch-up" provision
A limited "catch-up" provision allows those in their last 3 years before reaching normal retirement age to hold over larger amounts, as long as the full amount has not been used in previous years.
Retirement deduction
Contributions you made are excluded from federal gross income. For Massachusetts, these amounts are added back to compute Massachusetts gross income so you can claim the deduction for contributions made to a Massachusetts annuity, pension, endowment or retirement fund.
The maximum deduction allowed is $2,000 per taxpayer. The payments added back are reflected in Massachusetts wages, Box 16 of the W-2. This amount will be more than what's shown as Federal wages in Box 1 of the W-2.
Senior U.S. judges' pension distributions are subject to Massachusetts income tax and withholding requirements since they're not contributory.
Additional Resources
Federal employee Thrift Savings Plan (TSP)
The Thrift Savings Plan (TSP) provides federal employees with the same savings and tax benefits that many private employers offer. This plan is similar to private sector 401(k) plans. You can defer tax on part of your wages by contributing it to your accounts in the plan.
As an employee:
- Contributions made by an employer to a thrift savings plan are excluded from your gross income in the year contributed. See the "Current year exclusion amounts" table below for elective deferrals, including "catch-up" provisions.
- Income earned on the contributions while in the thrift savings plan account is excluded from gross income.
- Distributions made to the retiree from the plan are fully taxable in the year paid.
Special "catch-up" provision
A limited "catch-up" provision allows those in their last 3 years before reaching normal retirement age to hold over larger amounts, as long as the full amount has not been used in previous years.
457 deferred compensation plan
457 plans are deferred compensation plans set up for Massachusetts government employees. An example of a 457 plan is the Aetna Plan.
As a public employee:
- Contributions you made to a 457 plan for any tax year are limited to the smaller of a specific dollar limit or a third of your compensation, and the amount is excluded from the employee's gross income in the year contributed. See the "Current year exclusion amounts" table below for elective deferrals, including "catch-up" provisions.
If you participate in more than 1 governmental or tax-exempt employer unfunded deferred compensation plan, the total deferral can't be greater than the maximum exclusion amounts per table above. - Income you earned on the contributions while in the 457 plan account is excluded from gross income.
- Distributions made to you from the 457 plan are included in gross income in the year paid.
Special "catch-up" provision
A limited "catch-up" provision allows those in their last 3 years before reaching normal retirement age to hold over larger amounts, as long as the full amount has not been used in previous years.
Massachusetts police or fire department pension
Massachusetts police or fire department pensions are contributory annuity, pension, endowment, or retirement funds of the Commonwealth of Massachusetts (or any of its political subdivisions).
As an employee of Massachusetts:
- Contributions you made to a police or fire department contributory plan are included in gross income even though they are excluded from federal gross income.
- Income you earned on the contributions while in a police or fire department contributory plan is excluded from gross income.
- Distributions made to the retiree from a police or fire department contributory plan are excluded from Massachusetts gross income even though they are included in federal gross income.
- Annuities to dependents of policemen or firemen and certain other public employees killed while performing their duty are considered to be paid are not taxable. A city or town may grant an annuity to a surviving spouse not entitled to a retirement allowance and this would also be not taxable.
- Survivor annuity benefits paid on account of the death of a public safety officer killed in the line of duty are fully excluded from federal and Massachusetts gross income.
Retirement deduction
Contributions you made are excluded from federal gross income. For Massachusetts, these amounts are added back to compute Massachusetts gross income so you can claim the deduction for contributions made to a Massachusetts annuity, pension, endowment or retirement fund.
The maximum deduction allowed is $2,000 per taxpayer. The payments added back are reflected in Massachusetts wages, Box 16 of the W-2. This amount will be more than what's shown as Federal wages in Box 1 of the W-2.
Additional Resources
Massachusetts state and local employee contributory pension
Massachusetts state/local employee pensions are contributory annuity, pension, endowment, or retirement funds of the Commonwealth of Massachusetts (or any of its political subdivisions), including the MA Optional Retirement Program (ORP).
As an employee of Massachusetts:
- Contributions you made to a Massachusetts state and local employee contributory plan are included in Massachusetts gross income even though they are excluded from federal gross income.
- Income you earned on the contributions while in the Massachusetts state and local employee contributory plan is excluded from gross income.
- Distributions made to you from a Massachusetts state and local employee contributory plan are excluded from Massachusetts gross income even though they are included in federal gross income.
Massachusetts state/local employee contributory pensions that are paid to a surviving spouse are also tax-exempt.
Retirement deduction
Contributions you made are excluded from federal gross income. For Massachusetts, these amounts are added back to compute Massachusetts gross income so you can claim the deduction for contributions made to a Massachusetts annuity, pension, endowment or retirement fund.
The maximum deduction allowed is $2,000 per taxpayer. (Medicare premiums from your Social Security and retirement payments are not deductible.) The payments added back are reflected in Massachusetts wages, Box 16 of the W-2. This amount will be more than what's shown as Federal wages in Box 1 of the W-2.
Pre-retirement distributions
A pre-retirement distribution occurs when you receive distributions before retirement age, due to either ending state service or death. These are taxed as follows:
- The part of a pre-retirement distribution that reflects the previous contributions returned to you to the state retirement system is excluded from federal gross income. Since there is no specific Massachusetts provision to add this back, it is also excluded from Massachusetts gross income.
- The part of the pre-retirement distribution that reflects interest earned on amount contributed is included in federal gross income. However, this amount is excluded from Massachusetts gross income.
Additional Resources
MBTA pension
The MBTA pays a certain percentage of employee salaries into their retirement fund. These contributions are considered "picked up", which means they're designated as "employee contributions" even though the employees themselves don't actually pay into the fund.
As an employee of the MBTA:
- Designated "employee contributions" made by an employer to a MBTA plan are excluded from the employee's gross income in the year contributed since they're considered employer contributions. Withholding is not required on the contributions.
- Income earned on the contributions while in the MBTA plan is excluded from gross income.
- Distributions made to you from a MBTA plan are excluded from Massachusetts gross income since they are considered distributions from an employee contributory pension. These distributions, however, are included in federal gross income.
Social Security (FICA) and Medicare deduction and retirement deduction
Since the contributions are excluded from gross income, no retirement deduction is allowed for contributions to a Massachusetts:
- City
- Town
- County
- And other political subdivision annuity, pension endowment or retirement fund
However, since MBTA employees also pay into the Social Security system, they may deduct the FICA contributions, up to a maximum of $2,000, on their Massachusetts return.
Out-of-state employee contributory government pension
If you move into Massachusetts and receive pension payments from your former states' public employee retirement plans, you can deduct those amounts from your Massachusetts gross income if the former state doesn't tax income its residents receive from Massachusetts contributory public employee retirement plans.
First, include the income you received in your Massachusetts gross income as pension income on Form 1, Line 4. If the amount is deductible from Massachusetts gross income, claim it as a deduction on Schedule Y, Line 13.
If you're a Massachusetts resident, you can deduct income you receive from a contributory annuity, pension, endowment or retirement fund of another state or its political subdivisions if:
- The other state has a specific income exclusion for pension income which applies to Massachusetts state or local contributory public employee pension plans
- The other state has a specific deduction or exemption for pension income which applies to Massachusetts state or local contributory public employee pension plans
- The other state has no income tax
Part-year residents can take this deduction if they report a contributory pension that is reciprocal on Massachusetts Form 1-NR/PY. If a partial exclusion from income applies, reduce the Massachusetts related exclusion by the amount excluded in the former state during the same tax year.
Additional Resources
Tier I and II railroad retirement pension
Tier I or Tier II railroad retirement benefits are exempt from Massachusetts taxation. Railroad retirement lump-sum payments, commonly known as the insurance lump-sum payment and the residual payment, are exempt from Massachusetts taxation.
Tier I railroad retirement benefits are similar to Social Security benefits. You pay payroll tax and your employer matches it. "Social Security benefits" includes Tier I railroad retirement benefits.
Tier II railroad retirement benefits are amounts in addition to the Tier I and are financed through a payroll tax, which the employer pays most of. Tier II railroad benefits are exempt from state taxation under federal law.
U.S. military non-contributory pension
U.S. military pensions, which are included in federal gross income, are excluded from Massachusetts gross income.
U.S. military pensions are pensions from the following uniformed services:
- Air Force
- Army
- Coast Guard
- Commissioned Corps of the Public Health Services
- Marine Corps
- National Oceanic and Atmospheric Administration
- Navy
Junior Reserve Officers' Training Corps (JROTC)
If you're a retired commissioned or noncommissioned officer, you can serve as an instructor or administrator in JROTC units. The military pays the institution half of the difference between your retired or retained pay and the active duty pay and allowance you would have received for that period if you were on active duty.
If you're employed under these rules, you're not considered to be on active duty or inactive duty training. Therefore, you can't exclude the pay from gross income.
For federal purposes, you can claim I.R.C. s.134 as a reference for excluding a substantial portion of your wage income. For s.134, "qualified military benefit" means any allowance or in-kind benefit you received as member or former member of the uniformed services of the United States which was excludable from gross income on September 9, 1986 under provisions of law.
Your entitlement to income from the JROTC program is not received due to your status as a member or former member of the uniformed services, but rather is received as compensation for services rendered.
Veteran's Pension - G.L. c. 32, Sections 56-60
If you retired under M.G.L. Chapter 32, Sections 56 - 60 and are a veteran who began state service before July 1, 1939, you're taxed on your pension as follows:
- When you retired, you received a return of your contributions plus interest. The lump sum is not taxable.
- After receiving the lump sum, any pension amount received is considered non-contributory, and is taxable.
Reporting on your original return
Out-of-state employee contributory government pension
- Residents - Report the government pension income on MA Form 1 (Line 4) as pensions. Depending on the other state's tax treatment of Massachusetts pensions, some or all of the pension you reported as income can be excluded on Schedule Y (Line 13).
- Part-year residents - Report the government pension income you received as a resident on MA Form 1-NR/PY (Line 6) as pensions. Depending on the other state's tax treatment of Massachusetts pensions, some or all of the pension you reported as income can be excluded on Schedule Y (Line 13).
Documents to submit with abatement/amended tax return
- Copy of U.S. Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts
- Statement identifying the other state and the excludable or deductible amount
Current year exclusion amounts for elective deferrals, including "catch-up" contributions
SIMPLE IRA Governed by IRC Section 408(p) - Maximum Exclusion Amounts, And Additional Exclusion Amounts Allowed for Age 50 Catch-up Contributions
| Tax year(s) | Maximum exclusion | Additional exclusion for catch-up |
|---|---|---|
| 2019 | $13,000 | $3,000 |
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(s) | Maximum exclusion | Additional exclusion for catch-up |
|---|---|---|
| 2019 | $19,000 | $6,000 |
Page updated: March 4, 2020
Contact for Tax Treatment of Government Pensions in Massachusetts
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