MASSACHUSETTS/FEDERAL TAX DIFFERENCES
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
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