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Learn about the interest on your tax underpayment or overpayment

Learn how to assess the underpayment and overpayment of your taxes. 

Taxes are due and payable at the time your tax return is required to be filed. The tax is determined without regard to any extension of time for filing the return.

The assessment of interest relates to both underpayment and overpayment. Interest calculations can change quarterly.

Underpayment Interest Due on Unpaid Tax

If any amount of tax isn’t paid by the due date, tax interest will be added:

  • At the rate of the federal short-term rate per I.R.C. Section 6621(b)
  • Plus 4% points, simple interest

The federal short-term rate is set by the IRS and can change on a quarterly basis.

Overpayment Interest Due on Unpaid Tax

If you made an overpayment of your tax, the following applies:

  • The rate for underpayments of tax remains at the federal short-term rate:
    • Plus 4% points
    • Compounded daily
  • The rate for overpayment of tax has been reduced to the federal short-term rate:
    • Plus 2% points
    • Simple interest

Exception to Compounded Interest for Underpayment of Estimated Tax

Penalties for underpayment of estimated income tax is now calculated with simple interest instead of daily compounding.

The assessment of interest isn’t discretionary and the Commissioner doesn’t have the authority to abate interest accrued on unpaid tax.

Installment Sales, Large Sales Addition to Tax Calculation

Chapter 131 of the Acts of 2010, Section 46 provides for an increase in tax on certain taxpayers who defer payment of income tax through use of the installment sale method and is consistent with federal law.

Interest must be paid on Massachusetts deferred tax of certain installment sales:

  • Relating to installment obligations for the close of the tax year
  • Effective for tax years beginning on or after January 1, 2010

An addition to tax applies to taxpayers who have:

  • Deferred the gain and
  • The tax associated with that gain, on non-dealer installment sales with a sales price of over $150,000 if the aggregate face amount of installment obligations arising during the tax year and outstanding as of the close of the tax year exceeds $5 million.

An installment sale addition to tax must also be paid on:

  • The deferred gain from the installment sale of timeshares and
  • Residential lots if the sale meets certain criteria

The installment sale addition to tax is measured by an interest charge on the deferred tax from an installment sale gains.

Calculating the interest amount for G.L. c. 62C, § 32A (a)

To calculate the interest amount for non-dealer obligations exceeding both thresholds:

  • Sales price exceeds $150,000 and
  • The aggregate face amount of installment obligations arising during the tax year and outstanding as of the close of the tax year exceeds $5 million, determine the "applicable percentage" of the deferred tax liability with respect to the obligation

The "applicable percentage" is determined by:

  • Dividing the portion of the aggregate face amount of such obligations outstanding as of the close of the tax year in excess of $5 million by the aggregate face amount of such obligations arising in and outstanding at the close of the tax year.

Once determined, this percentage doesn't change.

The deferred tax liability for any tax year with respect to an installment obligation is:

  • The amount of unrecognized gain in the obligation as of the close of the tax year multiplied by your applicable tax rate.

To determine the addition to tax, multiply the deferred tax liability by the interest rate charged for payments in effect for the quarter in which your tax year ends.

If you are a partner in a partnership or a shareholder in an S corporation:

  • The $150,000/$5 million thresholds apply to you at the partner or shareholder level.

The "applicable percentage" will be determined by each partner or shareholder.

Once determined, this percentage doesn’t change in future tax years with regard to the transactions included in the ratio.

For more information, see:

  • I.R.C. § 453A, the regulations thereunder, and
  • Internal Revenue Service Publication 537

Massachusetts follows federal installment sales rules, to the extent practicable, in determining the amount subject to the addition to tax.

Calculating the interest amount under G.L. c. 62C, § 32A (b)

M.G.L. c. 62C, § 32A (b) deals with deferred payments for the installment sale of:

  • Timeshares
  • Campgrounds
  • Residential lots as defined in I.R.C. § 453(l)(2)(B)

To calculate the required interest amount, multiply the amount of tax attributable to the payments received on installment obligations by the underpayment rate determined under M.G.L. c. 62C, § 32 (a) as of the date of the sale compounded semi-annually, for the period beginning on the date of the sale and ending on the date payment was received.

Massachusetts follows federal rules, to the extent practicable, in determining the amount subject to the addition to tax under M.G.L. c. 62C, § 32A (b).

Calculating the interest for Partnerships/S Corporations

Partnerships/S corporations can indicate on the 3K-1 that they are:

  • Reporting transactions under M.G.L. c. 62C, 32A, identified as Internal Revenue Code section 453A or 453(l)(2)(B) transactions

These entities must:

  • Separately communicate information to the partner /shareholder, which will enable the partner /shareholder to calculate the addition to tax.

For 453A transactions

The partnership /shareholder must:

  • Inform the partner /shareholder of their share of the aggregate face amount of installment sales transactions arising in and outstanding as of the close of the tax year
  • Disclose any other information the partner/ shareholder may need to calculate the addition to tax

The $150,000/$5 million thresholds apply at the level of the individual partner /shareholder. The partnership/ S corporation must communicate to the partner/ shareholder all 453A installment sale transactions exceeding $150,000.

The "applicable percentage" is:

  • The ratio of the aggregate face amount of installment sale obligations arising in and outstanding as of the close of the tax year in excess of $5 million
  • To the aggregate face amount of such obligations arising in and outstanding at the close of the tax year

The "applicable percentage" will be determined by each partner/shareholder.

For 453(l)(2)(B) transactions

The partnership/S corporation must provide:

  • The partner/shareholder of the partner's/shareholder's share of gain on installment transactions
  • The date of the transactions
  • Any other information the partner /shareholder may need to calculate the addition to tax

Reporting interest on your original tax return

Enter interest amount in the appropriate box on:

  • Mass Form 1, Line 51 or
  • Mass Form 1-NR/PY, Line 55 and
  • Make sure amount is included in the total of either Line 51 or 55

Additional resources

Federal References:

  • I.R.C. Section 6621(b).

 

 

Page updated: February 26, 2020

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