When approaching Massachusetts Income Tax the biggest mistake that practitioners and taxpayers make is that they think that Massachusetts tax law is the “same as the federal”.  Always keep in mind that the Massachusetts tax law is similar to, but not the same as federal.

When examining the differences keep these four considerations in mind:

                       1)    Massachusetts defines income by reference to the IRS Code (IRC).   In the  current                                 law there are two sets of references:

     a) Generally for the definition of gross income the Code now in effect is that of
                                      1/1/05. All changes that effect gross income made to the IRC after that date                                             are not recognized.

b) For seven specific items the code reference is to the current code.  Thus in                                           the case of sale of principal residence, trade or business deductions, retirement                              plans &  Roth IRAs, any changes made to the Internal Revenue Code are                                                 immediately adopted Into Massachusetts Law.

  2)    Article 44 of the Massachusetts Constitution requires that the same class of income                          must be taxed at the same rate. This is the reason why there are different classes of                                 income and why Massachusetts cannot have a graduated income tax rate.

  3)    MA does not allow federal itemized deductions.

  4)  Massachusetts has additional deductions of it’s own.  Examples would be the                                     medical or adoption deduction, which are specifically allowed in MA law and do not come                        directly from the Federal,.the rent deduction, the child under 12 deduction and many more.

If you keep these four factors in mind you will have a much better chance of following Massachusetts
Income Tax.

A list of Some Common Federal/Massachusetts Tax Differences:

While this list is not exhaustive it represents many of the more common ones

Capital Losses  Federal:  Deductible against gains in part against income  Carry forward available

                         Mass    MA follows the code of 1/1/05 and allows you to offset losses against         
                                      gains and $1000 against interest and dividends, Carry forward is allowed


Capital Gains     Federal:   Calculated @ varying rates

                          Mass:  MA taxes long term gains at 5.3% and short term gains at 12%


Excess Trade or Business Deductions        Federal: Does not exist federally

Mass:  Concept reinstated as of 1/1/96


Interest on Student LoansFederal:  Allowed as a deduction against AGI on page one of the 1040 up to

   Mass:   Fully deductible, not limited by federal law.  MA has two student
interest deductions.The MA Part B “above the line” is deducted on line                                                     10 of  MA Schedule X. It is the Federal deduction. While the Part B                                                        “below the line” deducted on line12 of MA Schedule X is any interest                                                         amount that was no  deducted on line 10, but this deduction is only for                                                     undergraduate student interest.


Adoption Expenses           Federal:  This item is a credit
                                                Mass:   Fees fully deductible in year paid


ROTH IRAs  Federal: Non-deductible contribution Distributions tax free

                                                Mass:   MA treatment the same


Education IRAs   Federal: Non-deductible contribution  Distributions tax free

   Mass: MA treatment is the same


Sale of Principal Residence      Federal:  Excludes $250K or $500K if qualified

        Mass: MA treatment is the same    Note that the recent federal change
                                                        involving Forgiveness of Debt in personal residences is not adopted                                                         by Massachusetts because that change is a change to section 108                                                        not to the principal residence statutes  Special provision in MA Law,                                                           the exclusion can will increase with the Code, but never go below                                                          the $250K/$500K or be eliminated a by Federal Code change.


Section 162 "Trade or Business" Expenses         Deductible          MA follows the current code


Section 179 DepreciationFederal: Allowable write-off in 2008 - $250K  

       Mass: MA follows the current code Mass decoupled from the Federal                                                      bonus depreciation rules. No bonus depreciation for MA purposes.


SIMPLE plans for EmployeesExcluded from gross income       MA follows the current code


SIMPLES for the Self-employed        Federal:  Deducted from AGI

                                                   Mass: Not allowed as a deduction


Qualified Transportation Fringe Benefits        Federal:  Allows employer parking, van pool, etc.

   Mass: MA treatment the same


Moving ExpenseFederal:   Excluded from income
          Mass:    Excluded from income in a deduction provided by Mass Law


Employer Contributions to MSA          Federal: Excluded from income

Mass:    Excluded from income


Self-Employed Health Insurance        Federal:  100% deductible

Mass: 100% deductible


Real Estate Professionals                   Federal: A concept allowed since 1996

     Mass: Now recognized in Mass


DepreciationFederal: life & rate based on code of year put into service

                                Mass: Previously limited to code of 1998, now the depreciation will conform exactly                                   to the federal amount except for bonus depreciation


1231 Property   Federal:  If gain, property is taxed as if a capital asset  If sale is a loss it is taxed                                                  as if ordinary income subject to recapture

Mass: MA law makes it a capital asset always, not subject to recapture as ordinary
  income    This is an Article 44 issue


Code Section 911 ExclusionFederal: Meeting the requirements of Code Section 911, taxpayers                                                                      may exclude wages earned abroad.

    Mass: Mass does not recognize the Code Section 911 exclusion from                                                               gross income.


Code Section 1244 Stock Losses Federal:  under Section 1244, a taxpayer may claim an ordinary                                                                             loss on disposition of stock.

          Mass:  does not recognize this treatment. It is capital for                                                                      Massachusetts purposes under the 44th Amendment,  to the  
                                                              Massachusetts Constitution.

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