Learn about other types of Massachusetts income

Massachusetts income includes a wide variety of income from different sources. Find out what else you should count in your Massachusetts income.
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Fees

These fees are included in Massachusetts gross income:

  • Bartering income not reported on Schedule C (fair market value of goods or services received in payment for services)
  • Commissions
  • Director's fees
  • Election worker payments
  • Compensation earned as the executor or administrator of an estate
  • Tips not included on Form W-2

Limitation of losses

Massachusetts adopts the federal definition of "capital gain income" to include the restrictions on the deductions of losses from personal use property under I.R.C. §§ 165(c), 262 and 267. These restrictions are adopted in tax reporting forms and in proposed capital gains regulation.

Deductions on losses for individuals are limited to:

  • Losses incurred in a trade or business (allowed to claim as deduction in MA)
  • Losses incurred in a transaction for profit even if not connected to a trade or business (allowed to claim as deduction in MA)
  • Losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from:
    • Fire
    • Storm
    • Shipwreck
    • Other casualty, or
    • Theft
    You cannot claim this kind of loss as a deduction in Massachusetts because it is a personal casualty loss claimed as a U.S. Schedule A deduction for federal purposes.

Losses that are not deductible:

  • Losses for personal, living, and family expenses
  • Losses from related party transactions
  • Losses from property held for personal use, including:
    • A personal residence
    • Household goods
    • A personal automobile
    • Etc.

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Mortgage forgiveness

The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142) added an exclusion for indebtedness that is:

  • Discharged before January 1, 2010, and
  • Is qualified principal residence indebtedness

Subsequent acts, including the Tax Increase Preventions Act of 2014, amends the Internal Revenue Code to extend, through 2014, the exclusion from gross income of income attributable to the discharge of indebtedness on a principal residence.

Massachusetts does not adopt the exclusion or the extension because they were enacted after January 1, 2005.

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Other income/loss

Other income included in Massachusetts gross income:

  • Pre-1996 installment sales classified as ordinary income for Massachusetts purposes (from Massachusetts Schedule D, Line 9)
  • Embezzled or other income from illegal activities
  • Awards and bonuses received from an employer for performing services not part of a qualified award plan
  • Any other Form 1, Line 10 or 1-NR/PY, Line 12 income reported on U.S. 1040, Line 21 and not reported elsewhere on the Massachusetts return.

Other income and losses not included in Massachusetts gross income:

  • Any negative "net operating loss" reported on U.S. Form 1040, Line 21
  • Refunds of U.S. and Massachusetts income taxes. However, report interest on refunds on Massachusetts Schedule B.

Passive activity losses

Income and losses on a tax return are divided into 2 categories:

  1. Passive activities
  2. Nonpassive activities

Passive activities

These include income and losses from:

  • Trade or business activities, including:
    • Sole proprietorships
    • Farms
    • Partnerships
    • S-corporations, and
    • Limited liability companies
    In which individuals do not materially participate under the rules of I.R.C. § 469(h) during the year.
  • Rental activities, including equipment leasing and renting real estate, even if individuals materially participate, under the rules of I.R.C. § 469(h), in them during the year, unless they are real estate professionals.

A limited partner is generally passive due to more restrictive tests for material participation. As a result, limited partners will generally have passive income or losses from the partnership.

The passive activity rules apply to:

  • Individuals
  • Estates
  • Trusts (other than grantor trusts)
  • Personal service corporations, and
  • Closely held corporations

Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to owners of these entities.

Nonpassive activities

These include income and losses from the following activities:

  • Businesses, in which the taxpayer materially participates in on a regular basis, including:
    • Sole proprietorships
    • Farms
    • Partnerships
    • S-corporations
    • Limited liability companies, and
    • Trusts
  • Dividends
  • Gains and losses on stocks and bonds
  • Guaranteed payments
  • Interest income
  • Lottery winnings
  • Pensions
  • Royalties from the ordinary course of business
  • Salaries, wages, and 1099 commission income
  • Selling undeveloped land or other investment property

Federal treatment of passive activity losses

Federal law limits passive activity loss deductions. In general, a passive activity loss is the amount (if any) by which the passive activity deductions for the taxable year exceed the passive activity gross income for the taxable year. You can deduct passive activity losses only from passive activity income.

Calculating passive activity losses:

  • You cannot deduct the passive activity loss from other income for the taxable year.
  • The passive activity loss is suspended and carried forward to reduce passive activity income generated in future years.
  • If you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated party, you may (at the time you dispose of your interest) claim any unused suspended deductions in full.
  • You must keep records sufficient to prove passive activity income and losses.

$25,000 offset for actively participating in rental real estate activities:

You're an exception to the general rule if you're a qualifying taxpayer who actively participates in certain rental real estate activities. In this case, you may deduct, from other income, up to $25,000 in losses and credits.

  • Qualifying married persons filing joint returns - You may deduct up to the full amount.
  • Qualifying married taxpayers filing separate returns who lived apart during the entire taxable year - You may deduct up to half of the allowable income and phase-out amounts.
  • Qualifying married taxpayers filing separate federal returns who lived together at any time during the taxable year - You are not entitled to any offset.

For example, if you have nonpassive income (wages), passive income (from something like a limited partnership), and a loss from rental real estate activities you actively participated in, you can use part of your allotted $25,000 offset to offset your passive income. Meanwhile, you can use the rest of your allotted offset to offset your nonpassive income (wages).

Massachusetts treatment of passive activity losses

Massachusetts income tax laws follow the federal income tax limitations and phase-out amounts for passive activity loss deductions and rental real estate.

Calculating passive activity losses:

  • Allowable losses, and
  • Net passive activity income or losses

Are generally the same income/losses that are allowed on federal Form 8582. If you need to make adjustments for Massachusetts differences, calculate allowable losses on a federal Form 8582.

Losses not allowed for federal purposes are also not allowed for Massachusetts purposes.

$25,000 offset for actively participating in rental real estate activities:

Massachusetts follows the federal rules for applying the $25,000 offset for actively participating in rental real estate activities. The federal rules apply even if you were allowed to file joint federal returns but couldn't file joint Massachusetts returns because of different Massachusetts filing requirements.

Offsetting excess Part B passive losses against Part A income:

Generally, you may not use excess Part B deductions to offset other income. However, whenever you file a Massachusetts Schedule C or Schedule E, Massachusetts law allows such offsets if the following requirements are met:

  1. The excess Part B deductions are adjusted gross income deductions allowed under M.G.L. c. 62, s. 2(d), and
  2. These excess deductions may only be used to offset other income connected with actively conducting a trade or business or any other income allowed under I.R.C. § 469(d)(1)(B) to offset losses from passive activities.

If these requirements are met:

  • You may use the excess of Form 1 or Form 1-NR/PY adjusted gross income deductions over gross income offset Schedule B and D income, but only to the extent that the income is connected with actively conducting a trade or business of yours
  • Carryover passive losses which you may take upon disposing of your entire interest in the passive activity to an unrelated party in a fully taxable transaction may be used to offset:
    • Form 1 income
    • Form 1-NR income
    • Schedule B income, or
    • Schedule D income
    In the following order:
    1. Form 1 or Form 1-NR income attributable to the disposed passive activity for the taxable year
    2. Schedule B and D income attributable to all other passive activities for the taxable year
    3. Any other Form 1 or Form 1-NR income
    4. Schedule B and D income attributable to the disposed passive activity for the taxable year
    5. Other Schedule B and D income connected with actively conducting a trade or business of yours

Passive activity losses vs. net operating losses

Passive loss carryover deductions are different from net operating loss deductions. For Massachusetts purposes, net operating loss deductions under Code § 172 are not deductions.

Nonresidents:

Recalculate allowed passive activity losses based upon income or losses from passive activities which generate income taxable in Massachusetts. To do so, complete a federal Form 8582, using only those amounts from activities which generate income subject to Massachusetts tax. When completing the federal Form 8582, limit the amount of the $25,000 allowance for actively participating in rental real estate activities to the amount you were allowed for federal purposes.

Part-year residents who:

  • Meet the Massachusetts threshold income and exemption, and
  • Change status during a single taxable year from resident to nonresident, or from nonresident to resident

Must figure passive activity losses separately for residency and nonresidency periods.

Same-sex joint filers: 

Use federal Form 8582 to recalculate your loss limitations as if you are filing a joint federal return. The federal limitation favors single filers over married filers because federal law provides the same offset limitation to married couples that it provides to single taxpayers.

Additional Resources

Prizes and awards

Prizes and awards are included in Massachusetts gross income to the same extent they're included federally.

If you were awarded a prize in recognition of past accomplishments in:

  • Religious
  • Charitable
  • Scientific
  • Artistic
  • Educational
  • Literary, or
  • Civic fields

You generally must include the value of the prize in your Massachusetts gross income. The following prizes and awards are included in gross income and taxed at fair market value:

  • Prizes and awards from beauty contests
  • Prizes and awards from drawings
  • Prizes and awards from quiz programs
  • Prizes of merchandise

However, you can exclude these prizes from gross income if all of the following requirements are met:

  1. You were selected without any action on your part
  2. You are not required to perform substantial future services as a condition of receiving the prize or award, and
  3. You assign the prize or award to a governmental unit or tax exempt charitable organization

Employee achievement awards do not follow the same rules as the exceptions above. They are taxable unless they meet special rules for awards of tangible personal property given in recognition of length of service or safety achievement. Cash awards, gift certificates and similar items are taxable.

Gross income will not include the value of the award if the cost to the employer does not exceed the amount allowable as a deduction to the employer for the cost of the award.

Reporting on original tax return

  • On either Massachusetts Form 1 or Form 1-NR/PY, Schedule X, Line 4, enter the amount of fees and other income that you reported on U.S. Form 1040. Do not enter less than "0".
  • Exclude other income included in federal AGI, i.e. Social Security payments
  • Include other income excluded in federal AGI, i.e. Earned income from other sources

For jury duty, you can deduct the amount on Schedule Y, Line 9, as long as jury duty pay is surrendered by the employee to the employer in return for continuing your normal salary while on jury duty.

Additional Resources

Contact

Phone

Toll-free in MA: (800) 392-6089

Address

100 Cambridge Street
Boston, MA 02114

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