| Date: | 12/29/2005 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Personal Income Tax
I. Introduction
Massachusetts gross income includes all items included in federal gross income as defined in the Internal Revenue Code (the "Code") as amended and in effect as of a specific date, unless there exists a specific modification in the Massachusetts General Laws which includes a federally excluded item or excludes a federally included item from Massachusetts gross income. G.L. c. 62, § 2. As time passes and the Code changes, federal provisions are added, deleted or changed, thereby creating differences between the federal and Massachusetts personal income tax provisions. Periodically, the Massachusetts Legislature adopts a more recent version of the Code ("Code Update"), resulting in many changes to the Massachusetts personal income tax provisions.
The Massachusetts Legislature recently enacted Code Update which incorporated into Massachusetts personal income tax law the Code as amended and in effect on January 1, 2005. [1] Massachusetts previously used the Code as amended and in effect on January 1, 1998. As a result of Code Update, Massachusetts will now adopt many of the federal tax law changes that have been enacted by Congress in the past seven years, including the American Jobs Creation Act of 2004, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and the Job Creation and Worker Assistance Act of 2002. The purpose of this Technical Information Release is to explain the changes and effect of Code Update on the Massachusetts personal income tax provisions.
A. Current Code Provisions
While as a general rule Massachusetts will not adopt any federal tax law changes incorporated into the Code after January 1, 2005, there are certain specific provisions of the Massachusetts personal income tax that automatically adopt the current Code. For these specific provisions, Massachusetts will adopt any changes to the relevant Code provisions on a current basis, without the necessity of Code Update. These provisions are (i) Roth IRAs, (ii) Education IRAs, (iii) the exclusion for gain on the sale of a principal residence, (iv) trade or business expenses, (v) travel expenses, (vi) meals and entertainment expenses, (vii) the maximum deferral amount of government employees' deferred compensation plans, (viii) deduction for health insurance costs of self-employed, (ix) medical and dental expenses and (x) annuities. See TIRs 98-8 and 02-11 for further details on Massachusetts' personal income tax current Code provisions.
II. New Deductions
As a result of the Code Update, certain deductions allowed for federal tax purposes under the Code as amended and in effect on January 1, 2005 are now allowed for Massachusetts tax purposes.
A. Health Savings Accounts - IRC §§ 62(a)(19) & 223
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. For calendar year 2005, the contribution limit is equal to the lesser of the health plan's annual deductible or $2,650 for an individual plan or $5,250 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 2005, the contribution limits for an individual age 55 or older is equal to the lesser of the health plan's annual deductible or $3,250 for an individual plan or $5,850 for a family plan.
B. Deduction for Costs Involved in Unlawful Discrimination Suits
IRC §§ 62(a)(20) & 62(e)
Massachusetts adopts 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.
C. Educators' Deduction - IRC § 62(a)(2)(D)
Massachusetts adopts the deduction for expenses paid or incurred by an eligible educator for books, supplies, equipment (including computers and software) and other qualified materials used in the classroom. The deduction is limited to $250 per eligible educator.
D. Business Expenses of National Guard and Reserve Members
IRC §§ 62(a)(2)(E) & 162(p)
Massachusetts adopts the deduction 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.
E. Tuition and Fees Deduction - IRC §§ 62(a)(18) & 222
Massachusetts adopts the deduction for qualified higher education expenses. Taxpayers with adjusted gross incomes that do not exceed $65,000 ($130,000 in the case of married taxpayers filing joint returns) are allowed a maximum deduction of $4,000 and taxpayers with adjusted gross incomes that do not exceed $80,000 ($160,000 in the case of married taxpayers filing joint returns) are allowed a maximum deduction of $2,000. Under the Code as amended and in effect on January 1, 2005, this deduction is due to expire for tax years beginning after December 31, 2005.
Taxpayers may qualify for both the federal tuition and fees deduction and the Massachusetts College Tuition deduction. Taxpayers are not allowed to take both deductions and therefore should calculate both deductions and take the higher of the two.
Taxpayers who elect federally to take the Hope Scholarship or Lifetime Learning Credits under IRC § 25A and are therefore federally disallowed from taking the tuition and fees deduction under IRC §222, will also be disallowed from taking the tuition and fees deduction for Massachusetts personal income tax purposes. Therefore, taxpayers should take into account the loss of the Massachusetts allowance of the tuition and fees deduction when making the IRC § 25A election.
III. Federal Changes to Massachusetts Deductions Previously Allowed
Massachusetts has allowed certain federal deductions based on the Code as amended and in effect on January 1, 1998. Federal statutory changes to these deductions after January 1, 1998, had created differences between the Massachusetts and federal deductions. As a result of the Code Update, Massachusetts now adopts the federal statutory changes through the Code as amended and in effect on January 1, 2005. This section of the TIR describes the adopted changes to affected deductions.
A. Archer Medical Savings Accounts - IRC § 220
Under the January 1, 1998 Code, Massachusetts allowed a deduction for an Archer MSA contribution only for individuals who were active MSA participants before January 1, 2001. As a result of Code Update, Massachusetts adopts the federal deduction for Archer MSA contributions made on or after January 1, 2005 for all federally qualified individuals.
B. Deduction for Clean-Fuel Vehicles and Certain Refueling Property
IRC §§ 62(a)(14) & 179A
A federal and Massachusetts deduction is allowed for a portion of the cost of qualifying motor vehicles that use clean-burning fuel. Under the January 1, 1998 Code, this deduction was due to expire for vehicles placed in service after December 31, 2004. As a result of Code Update, Massachusetts adopts the new federal provision allowing the deduction for vehicles placed in service on or before December 31, 2006.
C. Student Loan Interest Deduction - IRC §§ 62(a)(17) & 221
A federal and Massachusetts 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 the January 1, 1998 Code, this deduction was limited to the first 60 months and subject to lower taxpayer income limitations.
As a result of Code Update, Massachusetts adopts the new federal provision that repealed the 60 month limitation and allows higher taxpayer income limitations, subject to annual inflation adjustments. For tax year 2005, the maximum deduction of $2,500 is reduced for taxpayers when federal modified adjusted gross income exceeds $50,000 ($105,000 for joint returns) and is completely eliminated when federal modified adjusted gross income is $65,000 ($135,000 for joint returns).
IV. Exclusions from Gross Income
As a result of the Code Update, all amounts which are allowed to be excluded from federal gross income under the Code as amended and in effect on January 1, 2005 will be excluded from Massachusetts gross income, unless a specific Massachusetts statutory modification adds the amounts back into Massachusetts gross income. See G.L. c. 62, § 2(a)(1) for a description of these addbacks. The items in this section are exclusions from federal gross income which will now be excluded from Massachusetts gross income.
Note: Some of the exclusions enumerated in this section are accounted for in an employee's pre-tax wage base and at year end in the employee's W-2. Given the Code Update statute was enacted at the end of the first effective tax year, employers will have to adjust the Massachusetts gross income amount in the 2005 W-2s of affected employees to reflect the newly adopted exclusions.
A. Parking, T-Pass and Vanpool Fringe Benefits - IRC § 132(f)
A federal and Massachusetts exclusion is allowed for employer-provided parking, transit passes and vanpool benefits (i.e. "qualified transportation benefits"), subject to monthly maximums. However, a federal Act subsequent to January 1, 1998, created differences between the Massachusetts and federal exclusion amounts. Further, Massachusetts did not adopt the federal exclusion (enacted subsequent to January 1, 1998), for transit pass and employer-provided vanpool benefits if the employer offered the benefit as a reduction in salary and the employee chose the benefit in lieu of salary.
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. Therefore, the Massachusetts exclusion amounts for tax year 2005 are $200 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.
B. Archer Medical Savings Accounts - IRC § 220
For federal income tax purposes, the earnings in an Archer MSA account accrue on a tax-free basis, and qualified distributions from an Archer MSA are excluded from gross income. Prior to Code Update, Massachusetts taxed earnings in an Archer MSA for individuals who became active participants on or after January 1, 2001 and also taxed distributions for such individuals to the extent such amounts were not previously taxed by Massachusetts.
As a result of Code Update, Massachusetts adopts the federal exclusion for earnings in, and qualified distributions from, an Archer MSA for all federally qualified individuals.
C. Health Savings Accounts - IRC § 223
For federal income tax purposes, the earnings in an HSA account accrue on a tax-free basis, and qualified distributions from a HSA are excluded from gross income. Prior to Code Update, Massachusetts taxed earnings in an HSA and also taxed distributions for such individuals to the extent such amounts were not previously taxed by Massachusetts.
As a result of Code Update, Massachusetts adopts the federal exclusion for earnings in, and qualified distributions from, an HSA.
D. Employer-Provided Adoption Assistance - IRC § 137
Under the January 1, 1998 Code, Massachusetts had adopted the federal exclusion for amounts paid by an employer for qualified adoption expenses paid on or before December 31, 2001; however, beginning for tax year 2002, Massachusetts no longer allowed the exclusion.
As a result of Code Update, Massachusetts adopts the federal exclusion for employer-provided adoption expenses paid (or treated as paid under IRC § 137) on or after January 1, 2005. In the case of an adoption of a child with special needs the exclusion applies regardless of whether the employee has qualified adoption expenses. For tax year 2005, the exclusion is limited to $10,630 per child and is phased out for taxpayers with federal modified adjusted gross income in excess of $159,450 and is completely phased out for taxpayers with federal modified adjusted gross income of $199,450.
E. Employer-Provided Educational Assistance - IRC §§ 127 & 132
Under the January 1, 1998 Code, Massachusetts had adopted the federal exclusion for qualified educational expenses reimbursed to an employee under an employer-provided education assistance program; however, for courses that began after May 31, 2000, Massachusetts no longer allowed the exclusion.
As a result of Code Update, Massachusetts adopts the federal exclusion for qualified educational expenses for undergraduate and graduate education expenses up to the federal annual maximum of $5,250 per calendar year.
F. Qualified Retirement Planning Services - IRC § 132(m)
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 IRC § 401(a) plans, annuity plans, government plans, IRC § 403(b) annuity contracts, SEPs and SIMPLE accounts. This exclusion is due to expire for tax or plan years beginning after December 31, 2010.
G. Department of Defense Homeowners Assistance Plan - IRC § 132(n)
As a result of Code Update, Massachusetts adopts the federal exclusion for the employee fringe benefit of payments received under the Homeowners Assistance Plan. Such payments are intended to compensate military personnel and certain civilian employees for a reduction in the fair market value of their homes resulting from military or Coast Guard base closure or realignment.
H. Military Fringe Benefits - IRC § 134
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 of 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.
I. Survivor Annuities of Fallen Public Safety Officers - IRC § 101(h)
For both Massachusetts and federal tax purposes an exclusion is allowed for amounts paid under a governmental plan as an annuity to the survivor of a public safety officer killed in the line of duty. However, a federal Act subsequent to January 1, 1998, created differences between the Massachusetts and federal exclusion amounts. Massachusetts had allowed an exclusion for amounts received in tax years beginning after December 31, 1996, with respect to individuals dying after that date.
As a result of Code Update, Massachusetts adopts the federal exclusion as amended and in effect on January 1, 2005, that extends the exclusion for such annuities from, and including, individuals dying after December 31, 1996 to individuals dying on or before December 31, 1996.
J. Survivor Annuities of Fallen Astronauts - IRC § 101(i)
As a result of Code Update, Massachusetts adopts the federal exclusion for death benefits paid by the U.S. government to the survivors of astronauts who die in the line of duty. The Massachusetts exclusion is effective for payments made on or after January 1, 2005.
K. Discharge of Indebtedness for Victims of Terrorism - IRC § 108 & P.L. 107-134
As a result of Code Update, Massachusetts adopts the federal exclusion for discharge of indebtedness due to the death of an individual resulting from the September 11, 2001, terrorist attacks or as the result of anthrax-related illness occurring on or after September 11, 2001, and before January 1, 2002.
L. Discharge of Indebtedness for Health Care Professionals - IRC § 108(f)(4)
As a result of Code Update, Massachusetts adopts the federal exclusion for National Health Service Corps Loan Program repayments made to health care professionals. Loan repayments received under similar state programs eligible for funds under the Public Health Service Act are also excluded from income.
V. New Gross Income Amount
A. Income from Discharge of Indebtedness; Satisfaction of Debt with Partnership
Interest - IRC § 108 (e)(8)
For both Massachusetts and federal tax purposes, when a partnership transfers a partnership interest to a creditor in satisfaction of partnership debt, the partnership is required to recognize cancellation of indebtedness income as if the debt were satisfied with money in an amount equal
to the fair market value of the partnership interest transferred. Any discharge of indebtedness income is allocable to the partners in the partnership immediately prior to the transfer. As a result of Code Update, Massachusetts adopts this provision as of January 1, 2005.
B. Gross Income for Extraterritorial Income ("ETI") - Repeal of IRC § 114
Effective for transactions on or after January 1, 2005, the exclusion for ETI is repealed. As a result of Code Update, Massachusetts adopts this repeal provision, including the provisions governing the phase-out of the benefit. Generally, the phase-out provisions allow taxpayers with transactions prior to 2005 to retain 100% of their ETI benefits; taxpayers with transactions during 2005 retain 80%, and taxpayers with transactions during 2006 retain 60% of their benefits.
/s/Alan LeBovidge
Alan LeBovidge
Commissioner of Revenue
AL:JXD:jw
December 29, 2005
TIR 05-16