Compensation for Active Service 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. For tax years 2022 and after, bonus payments made by a state or political subdivision thereof for service in a combat zone are also excluded from Massachusetts gross income..
Go to Mass. Tax Information for Military Personnel and their Spouses to learn more.
Court Awards and Damages
The following amounts, received by settlement or judgment, are included in gross income:
- Interest on any award
- Compensation for lost wages or lost profits (including compensation related to age discrimination settlements)
- Punitive damages
- Amounts received in settlement of pension rights (if taxpayer did not contribute to the plan)
- Damages for:
- Patent or copyright infringement
- Breach of contract
- Interference with business operations
Compensatory damages, received by settlement or judgment, are excluded from gross income if they are received on account of personal physical injury or physical sickness (whether received in a lump sum or installments).
Whether court awards or damages are fully or partially taxed on the Massachusetts return, litigation costs, such as attorney fees, may not be deducted unless they are related to certain unlawful discrimination suits or awards to whistleblowers under Internal Revenue Code (“Code”) § 7623(b), or, beginning in tax year 2022, the Securities Exchange Act of 1934, a state false claims act, or the Commodity Exchange Act.
Litigation costs related to unlawful discrimination and whistleblower suits that are deductible from Massachusetts gross income are reported on Schedule Y.
Gross income does not include amounts, also known as proceeds or death benefits, received (whether in a single sum or otherwise) under a life insurance contract if such amounts are paid by reason of the death of the insured.
Generally, all amounts payable on the death of the insured are excluded, whether these amounts represent the return of premiums paid, the increased value of the policy due to investment, or the death benefit feature (i.e., the policy proceeds exceeding the value of the contract immediately prior to the death of the insured.)
Beginning in tax year 2022, the exclusion for life insurance death benefits may be limited if the insurance policy is owned by the insured’s employer or if the insurance policy was sold or transferred. IRS Publication 525 provides detailed information on the taxation of life insurance proceeds, as well as certain other income items.
Deceased Public Safety Officers
Death benefits paid to a surviving dependent of a public safety officer who died in the line of duty are not taxable.
Accelerated Death Benefits paid under a life insurance contract (including sales or assignments to viatical settlement providers) for terminally and chronically ill insured individuals are excluded from federal and Massachusetts gross income.
Note: A viatical settlement provider is a person regularly engaged in the trade or business of purchasing, or taking assignment of, life insurance contracts on the lives of insureds.
Interest Earned on Death Benefits
If any amount excluded from gross income is held under an agreement to pay interest on such amount, the interest payments are included in gross income.
Injury Payments to Police, Fire and Public Safety Personnel
Compensation paid to police, fire, and public safety personnel who are granted leaves of absence because of injuries sustained in the performance of their duties:
- Is not subject to Massachusetts income taxation and
- Does not constitute wages subject to withholding
- Report these amounts as wages and
- Write "See attached statement" next to the account.
The same amount is then taken as a deduction on Schedule Y.
Incapacitated Firefighter or Police Officer Income Exclusion:
Although income received by a firefighter or police officer incapacitated in the line of duty is excluded from Massachusetts gross income, the income received must be:
- Included in the employee's Massachusetts gross income and
- Reported as wages (not subject to withholding)
The amount is then claimed as a Schedule Y deduction.
No Tax Status and Limited Income Credit Calculation:
This deduction impacts the calculation of No Tax Status and Limited Income Credit as it’s treated as an adjustment to arrive at Massachusetts adjusted gross income on the:
- Massachusetts AGI Worksheet (Schedule 1 instructions) and
- Schedule NTS-L-NR/PY
Nonresidents and part-year residents may claim this deduction only if it is directly related to taxable income reported on Form 1-NR/PY.
Life Insurance Policies/Premiums/Benefits
Life Insurance Proceeds:
Life insurance proceeds paid to a beneficiary are not taxable if received in a lump sum payment based on the amount due at the insured person's date of death.
Surrender of Policy for Cash:
Generally, proceeds are considered ordinary income to the extent they exceed the premiums paid less dividends received.
Dividends paid as a Reduction of Premiums:
Dividends paid by the insurance company as reduction of premiums are not taxable but they reduce the cost basis of the policy.
Interest paid or credited on these dividends (if left with the insurance company) is:
- Taxable as Part A, interest and dividends
- Reported on Schedule B
Interest received on an Insurance Policy:
Any amounts in excess of what would be payable at the time of the insured person's death is considered interest. This interest is:
- Taxable as Part A, income, interest and dividends
- Reported on Schedule B (including interest from SBLI purchased through a Massachusetts bank)
Group-Term Life Insurance Premiums:
An employee's gross income does not include the cost of up to $50,000 of group-term life insurance coverage provided by:
- An employer or
- Former employer
However, an employee's gross income does include the cost of employer-provided insurance that is more than the cost of $50,000 of coverage. If an employee pays any part of the cost of the insurance, the entire payment reduces, dollar for dollar, the amount that would otherwise be included in gross income.
Sick pay benefits received from an employer or from a plan paid for by an employer are taxable as wages. In certain instances employee benefits may be taxable as wages depending on employees' payments.
The rules for the taxability of sick pay received are as follow:
- If the employer pays all of the premiums for employees' sick pay insurance, the benefits received are:
- Taxable and
- Included as wages
- If employees pay all of the costs of their own coverage, the benefits received are not taxable
- If employees pay all or part of the cost of their sick pay insurance coverage with "pre-tax" dollars, the benefits received are:
- Taxable and
- Included as wages
- If the employer and employees share the cost of the sick pay insurance for the employees, the portion of the benefits that matches the percent of the employer's contribution is:
- Taxable and
- Included as wages
The balance is not taxable income.
Nonresidents working for Massachusetts employers receiving sick pay paid by their employers should report them as wages. The same rules apply for nonresidents as residents.
Sick pay received from an employer is subject to income tax withholding as if it were wages. If it is from a third party such as an insurance company, it is not subject to withholding unless requested by the taxpayer.
Under Workers' Compensation laws, gross income does not include amounts received as compensation for personal injuries or sickness while employees are out of work.
If an employee returns to work and is assigned to "light duties" while continuing to receive workers' compensation, such amounts are taxable.
Regular Salary Paid While Receiving Workers' Compensation:
If an employer continues to pay a regular salary to an employee who is out of work and receiving workers' compensation, the employee must turn over the workers' compensation payments to the employer.
The amount to be included in gross income is the difference between what was paid and what was returned.
Example: John was injured while at work and was out of work for two months. His company continued to pay his weekly salary of $475, and he also received workers compensation of $100 a week from the state. He is required to turn over the $100 a week of workers' compensation to his employer. The balance of $375 ($475 - $100) a week must be included in gross income as taxable wages.
Note: To be eligible for tax free workers’ compensation benefits you need to have suffered a work-related injury or illness or be a dependent of a worker killed on the job.
- M.G.L. Chapter 62, Sections 2(a)
- M.G.L. Chapter 62, Sections 2(a)(2)(K)
- M.G.L. Chapter 41, Section 111 F
- TIR 03-8: Massachusetts Income Tax Filing Extensions for Military Personnel in the Persian Gulf Area
- TIR 02-4: Military Personnel Serving in Afghanistan
- TIR 99-6: Military Personnel Serving in Kosovo
- LR 85-47: Withholding Requirements for Dependent Care Assistance, Sick Pay and Distributions from Qualified Plans
- LR 80-32: Compensation Paid to Injured Personnel Pursuant to G.L. c. 41, s. 111F
- TIR 23-5: Chapter 62 Conformity to Select Provisions of the 2022 Internal Revenue Code
- Internal Revenue Code §§ 101; 104(a); 105(a); 112; 264
- IRS Publication 525
Contact for Death, Injury, Sickness Benefits, and Certain Other Compensation
9 a.m.–4 p.m., Monday through Friday