Technical Information Release  TIR 23-1: Tax Provisions in the Fiscal Year 2023 Budget, Including Massachusetts Personal Income Tax Code Update

Date:	01/05/2023
Referenced Sources:	Massachusetts General Laws

I. Introduction

This Technical Information Release (“TIR”) explains certain provisions included in the Massachusetts Fiscal Year 2023 Budget (the “FY23 Budget”).[1]  The provisions include (i) the conformity of the personal income tax to the Internal Revenue Code (“Code”) as amended on January 1, 2022 and in effect for the taxable year (“Code Update”); (ii) the decoupling of the personal income tax from Code § 199A, which provides a federal deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity; (iii) the creation of a personal income tax exclusion for the forgiveness of student loans; and (iv) the repeal of an unconstitutional tax on illegal drugs.

II. Code Update

In general, the Massachusetts personal income tax determines a taxpayer’s Massachusetts gross income based on the taxpayer’s federal gross income as defined under the Code as amended as of a specific date and in effect for the taxable year.[2]  The Massachusetts personal income tax also looks to the Code as amended as of a specific date and in effect for the taxable year in determining certain deductions.  Pursuant to the FY23 Budget, the Massachusetts personal income tax generally conforms to the Code as amended on January 1, 2022 and in effect for the taxable year for these purposes, effective for taxable years beginning on or after January 1, 2022.[3]  The Massachusetts personal income tax previously followed the Code as amended on January 1, 2005 and in effect for the taxable year.  As a result of the Code Update, the Massachusetts personal income tax will now conform to many federal tax law changes affecting the determination of Massachusetts gross income and deductions that have been enacted since 2005.  As of the issuance of this TIR, the Department has identified the following new or amended Code provisions to which the Massachusetts personal income tax now conforms:

• Code §§ 61(a)(8) and 62(a)(10):  Repeal of inclusion of alimony received as gross income and repeal of deduction for alimony payments
• Code § 62(a)(2)(D):  Teacher’s expense deduction
• Code § 62(a)(14) and 179A:  Repeal of deduction for clean-fuel vehicles
• Code § 62(a)(21):  Whistleblower attorneys’ fees deduction
• Code § 74(d):  Exclusion from gross income of Olympic and Paralympic medals and prizes
• Code § 83(i):  Property transferred in connection with performance of services – treatment of qualified equity grants
• Code § 101(a):  Transfer of life insurance contract for valuable consideration rules
• Code § 101(j):  Treatment of certain employer-owned life insurance contracts
• Code § 104(a)(6):  Exclusion from gross income of certain compensation received by public safety officers and their dependents
• Code § 108(a)(1)(E):  Exclusion from gross income of discharged qualified principal residence indebtedness
• Code § 108(f)(4):  Exclusion for assistance provided to participants in State student loan repayment programs for certain health professionals.
• Code § 117(c)(2)(C):  Exclusion from gross income of amounts received under the Work Colleges Program
• Code §§ 127(c)(1) and 221(e):  Exclusion from gross income of certain employer payments of student loans
• Code § 132(f):  Exclusion from gross income of employer-provided transportation fringe benefits
• Code §§ 132(g) and 217:  Moving expense deduction and exclusion from gross income of qualified moving expense reimbursement
• Code § 134(b)(6):  State payments to service members excluded from gross income as qualified military benefits
• Code § 139B:  Exclusion from gross income of benefits provided to volunteer firefighters and emergency medical responders
• Code § 139D:  Exclusion from gross income of Indian healthcare benefits
• Code § 139E:  Exclusion from gross income of Indian general welfare benefits
• Code § 139F:  Exclusion from gross income of certain amounts received by wrongfully incarcerated individuals
• Code § 139I:  Exclusion from gross income of certain COBRA premium assistance 
• Code § 152:  Modification of definition of “Dependent”
• Code § 216(b)(1):  Alternative tests for qualifying as cooperative housing corporation
• Code § 267(d):  Prevention of transfer of certain losses from tax indifferent parties
• Code § 274(a)(4):  Limitation on deduction by employers of expenses for fringe benefits
• Code § 274(j)(3)(A):  Prohibition on cash, gift cards, and other non-tangible personal property as employee achievement awards
• Code § 302(a), (b):  Certain redemptions treated as exchanges
• Code § 457A:  Nonqualified deferred compensation from certain tax indifferent parties
• Code § 461(j):  Limitation on excess farm losses of certain taxpayers (suspended for tax year 2018 through 2026)
• Code § 461(l):  Limitation on excess business losses of noncorporate taxpayers (for tax years 2021 through 2026)
• Code § 470(c)(2):  Tax-exempt use property
• Code § 682:  Repeal of inclusion in divorced spouse’s gross income of certain estate or trust income
• Code § 1012(c), (d):  Determination of basis of certain securities on account by account or average basis method
• Code § 1016(a)(1)(B):  Clarification of tax basis of life insurance contracts
• Code § 1031(a)(1):  Like-kind exchanges of real property
• Code § 1035:  Certain exchanges of insurance policies
• Code § 1044:  Repeal of rollover of publicly traded securities gain into specialized small business investment companies
• Code § 1221(a)(3):  Certain self-created property not treated as a capital asset
• Code § 1256(b):  Certain swaps, etc., not treated as Code § 1256 contracts

This may not be an exhaustive list.  Taxpayers and tax practitioners should independently verify which Code sections Massachusetts law now conforms to, as relevant to their filing positions.  DOR intends to provide additional guidance explaining in more detail the impact of the Code Update on Massachusetts conformity with respect to certain of these provisions.

III. Decoupling from the 20% Deduction for “Pass-through” Businesses provided by Code § 199A

The FY23 Budget adds G.L. c. 62, § 2(d)(1)(Q), which provides that in determining Massachusetts Part B adjusted gross income for purposes of the personal income tax, the federal deduction afforded by Code § 199A is not allowed.[4]  Code § 199A provides a deduction of up to 20% for qualified business income from a qualified trade or business operated directly or through a pass-through entity.  Because the deduction in the Code was enacted in 2017 and was effective for tax years beginning in 2018 and thereafter, Massachusetts did not conform to the deduction for taxable years beginning before January 1, 2022.  See TIR 18-14.  Massachusetts personal income tax now generally conforms to the Code as amended on January 1, 2022 and in effect for the taxable year, as noted above.  However, because the FY23 Budget specifically decouples from Code § 199A, it remains the case that Massachusetts does not conform to this section.[5]

IV. Income Exclusion for Forgiveness of Student Loans

The FY23 Budget adds G.L. 62, § 2(a)(2)(R), which provides an exclusion from Massachusetts gross income of income attributable to most discharges of certain student loans where such income is otherwise not excluded from Massachusetts gross income.[6]  This exclusion is substantially identical to the federal exclusion provided by Code § 108(f)(5), which Massachusetts follows as amended and in effect for the taxable year.[7]  While the federal exclusion provided by Code § 108(f)(5) only applies to discharges of certain student loans for taxable years beginning on or after January 1, 2021 and ending on or before December 31, 2025, the new Massachusetts deduction does not have a sunset date.  Therefore, for taxable years beginning on or after January 1, 2022, taxable income from the discharge of certain student loans will continue to be excluded from Massachusetts gross income pursuant to G.L. c. 62, § 2(a)(2)(R), irrespective of any sunset of the exclusion from federal gross income provided by Code § 108(f)(5).[8]

V. Repeal of Unconstitutional Tax on Illegal Drugs

The FY23 Budget repeals G.L. c. 64K, which imposed a tax on illegal sales of marijuana and controlled substances (the “controlled substances tax”).[9]  Under G.L. c. 64K, when a dealer illegally purchased, acquired, transported, or imported into Massachusetts marijuana or controlled substances, the dealer was required to pay the controlled substances tax.  However, the Supreme Judicial Court (“SJC”) ruled in Commissioner of Revenue v. Mullins, 428 Mass. 406 (1998), that the Fifth Amendment of the United States Constitution restricts the ability of the Commonwealth to assess the tax against those who have suffered criminal penalties for the same possession of marijuana or controlled substances. Accordingly, the controlled substances tax is unenforceable.

Legal sales of marijuana by a “marijuana retailer” as defined in G.L. c. 94G, § 1 remain subject to the Massachusetts sales and use tax and the marijuana excise, as well as the marijuana local option if the city or town where the marijuana retailer is located has accepted this option. See generally G.L. c. 64N.  

                                                                                    /s/Geoffrey E. Snyder
                                                                                    Geoffrey E. Snyder
                                                                                    Commissioner of Revenue

GES:RHF:db

January 5, 2023

TIR 23-1

[1] St. 2022, c. 126.

[2] G.L. c. 62, §§ 1(d), 2(a).

[3] FY23 Budget, §§ 30, 189.

[4] FY23 Budget, § 32.

[5] FY23 Budget, § 189.

[6] FY23 Budget, § 31.

[7] G.L. c. 62, § 1(c).

[8] FY23 Budget, § 189.

[9] FY23 Budget, § 33.