Massachusetts State Income Tax: Key Insights and Filing Tips 2023

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If you are a Bay State resident or earn income from sources there, it’s crucial to have a solid understanding of the state’s tax laws. With the extended filing date of October 16 fast approaching, now is the ideal time for you to ensure you’re well-informed and compliant with Massachusetts tax regulations.

Do You Owe Massachusetts State Income Tax?

Massachusetts taxes its residents (even part-year residents) on their income from all sources, i.e., whether received from sources within or outside of the state. Nonresidents are taxed on income derived from Massachusetts.

If your Massachusetts gross income (income from all sources during your time as a Massachusetts resident) was $8,000 or higher, you have to submit a Massachusetts personal income tax return by April 15 at the end of each tax year. Now, if this deadline coincides with a Saturday, Sunday, or legal holiday, the due date is extended to the subsequent business day, as it was this year - April 18, 2023.

Do note that this $8,000 threshold applies per person. If an individual meets or exceeds the $8,000 threshold, they must file a return. If married, they have the option to file jointly, regardless of whether the spouse has their own filing requirement.

If you earned less than this threshold, you needn’t file a return but can file one to claim refundable tax credits.

What Is the Income Tax Rate in Massachusetts?

In the tax year 2022, Massachusetts taxes income at a rate of 5%. This is a flat tax rate.

A flat tax is a system where all taxpayers, regardless of their income level, are subject to a uniform tax rate. This means that Massachusetts employs a different approach from the one employed by the federal government and numerous other states. The federal government has a system where different income segments are subject to increasingly higher tax rates based on earnings.

Some specific capital gains such as short-term capital gains and gains on collectibles are subject to a 12% tax rate. Also, starting from 2023, those earning more than $1 million will have to pay an additional 4% in income tax, taking the tax rate applicable to them up to 9%.

What Does Gross Income Include?

Gross income includes earned income and unearned income.

  • Earned income includes salaries, wages, tips, and commissions.
  • Unearned income includes interest, dividends, and capital gains.

Are You a Massachusetts Resident?

Full-Year Residents

If you’re a full-year resident and your annual gross income in Massachusetts exceeds $8,000, you’re required to submit a Massachusetts tax return.

You qualify as a full-year resident if:

  • Your primary residence is in Massachusetts for the entire tax year, or
  • Your primary residence is not in Massachusetts for the full tax year, but you:
    • Maintain a residence in Massachusetts, and
    • Spend a total of over 183 days in Massachusetts during the tax year, including days spent partially in the state.

Full-year residents should utilize Form 1 - Massachusetts Resident Income Tax Return for their filings.

Part-Year Residents

If you’re a part-year resident and your annual gross income in Massachusetts surpasses $8,000, you must file a Massachusetts tax return. Do note that if you’re a part-year resident, you’re typically liable for taxes on all income received, whether it’s from sources within or outside of Massachusetts during the period you’re a resident of the state.

You qualify as a part-year resident if:

  • You relocate to Massachusetts during the tax year and establish residency, or
  • You leave Massachusetts during the tax year and cease to be a resident.

Part-year residents should use Form 1-NR/PY - Massachusetts Nonresident or Part-Year Resident Income Tax Return for their filings.

Nonresidents

If you’re a nonresident with an annual Massachusetts gross income exceeding either $8,000 or your prorated personal exemption, whichever is lower, you’re required to submit a Massachusetts tax return.

You’re classified as a nonresident if you do not meet the criteria for full-year or part-year residency.

Nonresidents should use Form 1-NR/PY - Massachusetts Nonresident or Part-Year Resident Income Tax Return.

How Is Massachusetts Income Tax Computed?

Here’s how to go about calculating your taxable income:

Calculate gross income → Calculate Massachusetts AGI → Subtract certain deductions from AGI = Massachusetts taxable income

Calculating Gross Income

Here’s how to compute your Massachusetts’s gross income:

  • Step 1: Add your federal gross income (located on Form 1, Line 10 or Form 1-NR/PY, Line 12 for part-year residents and nonresidents).
  • Step 2: Add income that is excluded from federal calculations but included in Massachusetts.
  • Step 3: Subtract income that is included in federal calculations but excluded from Massachusetts.
  • Step 4: Deduct income that is excluded from both federal and Massachusetts calculations.

The result will be your Massachusetts gross income.

Federal gross income + Massachusetts-state additions - Massachusetts-state subtractions - Deductions (Federal and state) = Gross income

Calculating Massachusetts AGI

Once you calculate your gross income, you must calculate your Massachusetts adjusted gross income (AGI) to ascertain your Massachusetts taxable income. This will also help you ascertain your eligibility for No Tax status (NTS) or Limited Income credit (LIC).

If you are a low-income Massachusetts resident, you do not have to pay state income taxes, as you will qualify for the No Tax status.

Here’s the criteria you need to fulfill to qualify.

Filing Status Massachusetts AGI
Single $8,000 or less
Head of household $14,400 or less + $1,000 per dependent
Married filing jointly $16,400 or less + $1,000 per dependent

If your income is higher than what qualifies for the No Tax status, you may still qualify for the Limited Income credit, which can lower your tax burden. Here’s the criteria for that.

Filing Status Massachusetts AGI
Single $14,000
Head of household $25,200 + $1,750 per dependent
Married filing jointly $28,700 + $1,750 per dependent

Here’s how to compute your AGI:

  • Step 1: Add your federal gross income (located on Form 1, Line 10 or Form 1-NR/PY, Line 12 for part-year residents and nonresidents).
  • Step 2: Include Schedule B, Line 35 (which encompasses interest, dividends, and short-term capital gains).
  • Step 3: Add Schedule D, Line 19 (long-term capital gains).
  • Step 4: Subtract Schedule Y, Lines 1 - 10.
  • Step 5: Deduct Schedule B adjustments.
  • Step 6: Deduct Schedule D adjustments.

The resulting figure will be your Massachusetts adjusted gross income.

Calculating Massachusetts Taxable Income

You need to subtract the following deductions from your AGI:

  • Massachusetts deductions on Form 1 (Lines 11–14) and Form 1-NR/PY (Lines 11–16):
    • Deductions on rent paid in Massachusetts
    • Social Security (FICA) and Medicare deduction
  • Deductions on Schedule Y (Lines 11–16):
    • Claim of right deduction
    • College tuition deduction
    • Commuter deduction
    • Human organ donation deduction
    • Out-of-state employee contributory government pension
    • Massachusetts undergraduate student loan interest deduction
  • Massachusetts personal income tax exemptions: These reduce how much income you owe.

What Deductions Can You Claim?

As mentioned earlier, you can claim certain deductions to reduce your taxable income. Here’s a more detailed look at them:

  • Standard deduction: Massachusetts does not provide a standard deduction.
  • Attorney fees and court costs: You can claim a deduction for legal expenses and court fees that you (or someone acting on your behalf) incurred in any actions related to a claim of unlawful discrimination.
  • Rent deduction: If you reside primarily in Massachusetts and paid rent to a landlord in the previous year, you have the option to deduct 50% of the rent paid, up to $3,000 (up to $1,500 for those filing separately as married).
    • Joint rent: If two or more individuals jointly rent a place, each person can claim a deduction provided they each use it as their main residence. The deduction amount is based on the rent that each person pays.
    • Rent paid by a third party: If a third party, like a parent, whose principal resident is elsewhere, covers your rent, you do not qualify for this deduction.
  • Claim of right deduction: Individuals who have previously paid Massachusetts state income taxes on earnings attributed to them through a Claim of Right can subtract that income from their total earnings if it turns out they were not actually entitled to it and have since repaid the relevant amounts. This deduction is permissible in the year of repayment, given that the sum was previously included in Massachusetts taxable income and the repayment is not eligible for any other deductions when determining Massachusetts income.
  • College tuition deduction: Should you, your spouse, or your dependent attend an accredited two- or four-year college for degree, diploma, or certificate programs, you may deduct tuition expenses that exceed 25% of your Massachusetts AGI. However, any scholarships, grants, or financial aid received by the student must be subtracted from the total tuition costs. It’s important to note that only the expenses directly related to attending the institution are deductible. Costs such as room and board, books, or personal living expenses are not eligible.
  • Commuter deduction: Individuals who commute for work are eligible to deduct certain transportation expenses, including tolls paid through an E-ZPass MA account and the costs of weekly or monthly passes for Massachusetts’ public transit system (MBTA transit, bus, commuter rail, commuter boat). You can claim expenses exceeding $150 (for married taxpayers filing jointly, expenses above $150 per person can be claimed). However, the total deduction per person cannot cross $750. If your employer reimbursed a portion of your expenses, the total deductible amount must be adjusted for the reimbursement.
  • Other deductions: Massachusetts allows for various additional deductions, such as surrendering jury duty pay to your employer and other specific expenses.

Massachusetts State Income Tax Credits

Credits allow you to decrease how much tax you owe.

  • Earned income tax credit: The EITC is a tax credit designed for individuals with low or moderate earnings. The Massachusetts EITC is accessible to specific individuals or households who satisfy the federal EITC’s tax criteria. To be eligible for the Massachusetts EITC, you must submit a tax return, have residency in Massachusetts for a portion of the taxable year, and fulfill the qualifying criteria.
  • Income tax paid to another jurisdiction: You could qualify for this type of credit if you owe taxes in other jurisdictions. This credit is applicable solely to income that is both reported and taxed on a Massachusetts tax return. It can be claimed for taxes paid to various entities, including:
    • Other US states, including payments made under acts like the Rhode Island Temporary Disability Insurance Act, as long as they meet all requisites and essentially function as income tax
    • Any US territory or dependency, which includes Puerto Rico, the Virgin Islands, Guam, and the District of Columbia
    • The Dominion of Canada or any of its provinces (However, you must first deduct the amount allowed as a federal Foreign Tax Credit on US Form 1116, regardless of whether it was claimed or not)
    • The New Hampshire Business Profits Tax, which is considered income tax
    • The District of Columbia Unincorporated Business Franchise Tax (UBT)
  • Solar, wind, and energy tax credit: Massachusetts residents, whether full-year or part-year, who have their primary residence in the state may qualify for the solar, wind, and energy tax credit, applicable only to solar and wind energy systems. This credit can be claimed for either 15% of the net expenditure on the renewable energy source property or up to $1,000, whichever is less. While this credit cannot be refunded, any excess can be carried forward for a period of up to three years.
  • Lead paint removal tax credit: Property owners in Massachusetts who have paid for the removal or repair of a lead paint issue may be eligible for a tax credit, provided they have adhered to state regulations. This credit is not refundable, but any excess credit can be carried forward for up to seven years.

Income Tax Exemptions in Massachusetts

A personal income tax exemption allows a portion of Massachusetts filers’ salary to be deducted from the income tax they owe.

Filing status Exemption
Single $4,400
Married filing separate $4,400
Head of household $6,800
Married filing joint $8,800

Here are some other types of exemptions:

  • Adoption fee exemption: You can deduct fees paid to a licensed adoption agency for adopting a minor child. This includes the full amount paid during the taxable year, regardless of whether the adoption is completed within that year. Exemptions don’t apply to expenses reimbursed by an employer.
  • Age 65 or over exemption: Individuals who are 65 or older by the end of the year may claim a $700 exemption. If filing jointly, both spouses can claim this exemption if they meet the age requirement.
  • Blindness exemption: A $2,200 exemption is available if you or your spouse is legally blind at the end of the taxable year. Massachusetts defines legal blindness based on specific visual acuity or reduced peripheral vision.
  • Dependent exemption: You can claim a $1,000 exemption for each qualifying dependent, which includes both qualifying children and relatives (it doesn’t include you or your spouse). Even if a dependent files their own income tax return, you may still claim this exemption if they meet specific dependency tests.
  • Massachusetts bank interest exemption: You can claim an exemption of either $200 (if married filing jointly) or $100 (for other filing statuses) to report Massachusetts bank interest.
  • Medical/dental exemption: You can claim an exemption for medical, dental, and other expenses paid during the taxable year. This deduction is based on itemizing deductions on your US Form 1040. For 2022, if medical/dental expenses exceed 7.5% of your federal AGI, you may claim a medical and dental exemption in Massachusetts.

These exemptions have specific reporting instructions for tax returns. For instance, the amount should be entered on specific lines of Form 1 or Form 1-NR/PY. If submitting an abatement or amended return, supporting documents may be required.

Tax Filing Extensions

You will receive an automatic six-month extension for filing your Massachusetts income tax return if you have paid at least 80% of the total tax amount due by the original deadline.

The extension period begins on the original filing due date. You have the flexibility to file your return at any point during this extended period. However, it’s important to note that this extension only applies to the filing deadline, not to the deadline for paying any taxes owed.

Taxpayers affected by federally declared disasters in the United States automatically get an extension for both filing returns and making tax payments.

What If You Fail to File a Return?

If you fail to file your return, the penalty is 1% per month, or fraction thereof, of the unpaid tax up to a maximum of 25%. It is the same for failure to pay any tax due.

Filing Tips

  • E-filing: The Massachusetts Department of Revenue strongly encourages taxpayers to utilize online platforms for filing and paying their tax returns - refunds happen more quickly, among other benefits. Filing can be carried out either through a tax vendor or the MassTaxConnect portal. Additionally, traditional paper filing options are available.
  • Organize your documents: Gather all necessary documents including W-2s, 1099s, receipts, and any other supporting documentation. This helps ensure you have all the information needed to accurately complete your return.
  • Explore deductions and credits: Familiarize yourself with the available deductions and credits specific to Massachusetts. These may include the Massachusetts earned income tax credit (EITC), education credits, and others.
  • Adding identification information: You can add license or state identification information to your 2022 return, even though this is not a necessity. By doing this, you can protect yourself from identity theft and validate your return.
  • Review previous returns: Take a look at your previous year’s tax return. It can serve as a helpful reference and ensure you don’t overlook any deductions or credits that you claimed in the past.
  • Check for errors: Before submitting your return, double-check all calculations and entries. Even a small error can lead to complications later.
  • Keep copies of your return: After filing, make sure to keep copies of your filed return, along with all supporting documents. It’s recommended to keep tax records for at least three years.

Key Takeaways

  • October 16, 2023, is the extended filing deadline for Massachusetts state taxes in 2023.
  • Massachusetts residents, including part-year residents, are taxed on all sources of income, both within and outside the state.
  • If your Massachusetts gross income exceeds $8,000, you must file a state income tax return.
  • The flat tax rate in Massachusetts for 2022 is 5%.
  • Different types of income (earned and unearned) are included in gross income.
  • There are specific criteria for full-year, part-year, and nonresident status in Massachusetts.
  • Different forms are used for filing based on residency status.
  • The process of calculating taxable income involves several steps including adjustments for deductions.
  • Various deductions, credits, and exemptions are available.
  • Extensions for filing taxes are available under certain conditions.
  • Failure to file or pay taxes on time can result in penalties.
  • E-filing is encouraged for faster processing and convenience.

Conclusion

Understanding and navigating Massachusetts state tax regulations is crucial for residents and individuals earning income within the state. With the extended filing deadline of October 16 just around the corner, it’s imperative to be well-informed and compliant with these laws. Knowing your filing status, deductions, credits, and exemptions can significantly impact your tax liability.

Seeking professional advice when faced with complex tax situations is always advisable. By doing so, you can navigate the Massachusetts state tax process with confidence and ease.