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This material courtesy of Philip Dardeno, CPA MST of Somerville, MA ~ 617-625-9820
Mr. Dardeno specializes in MA tax issues concerning Audits & Appeals for both Corporations and Individuals.
Tax Changes for Tax Year 2007
179 Deduction
For tax years beginning on or after January 1, 2007, DOR adopts the new current Code provision under the federal Small Business and Work Opportunity Tax Act of 2007 for IRC §179; the election to expense property in its initial year is extended through 2010 and increased from $100,000 to $125,000. The expense deduction begins to phase out if more than $500,000 of eligible property is placed in service during the year (up from $400,000.) These amounts will be adjusted for inflation annually.
Attorneys Fees Relating to Awards to Whistleblowers
The federal Tax Relief and Health Care Act of 2006 added this federal deduction. DOR does not adopt this deduction as it was enacted after January 1, 2005.
Educators' Deduction
For tax years beginning on or after January 1, 2006, the Educator's Deduction has been repealed. Even if Congress extends this deduction, DOR will not adopt the extension because it will occur after January 1, 2005.
Film Incentive Credit
For taxable years beginning on or after January 1, 2006, motion picture production companies may claim two different tax credits against either their personal income tax or corporate excise liabilities. Each credit has its own qualification requirements and taxpayers may qualify for and claim both credits.
For taxable years beginning on or after January 1, 2007, the following changes have taken place:
- The minimum expenditure threshold required to be met in a twelve-month period has been lowered from $250,000 to $50,000;
- the payroll credit has been increased to apply to 25% of a taxpayer's qualifying expenditures;
- the $7,000,000 limitation on the amount of credits taken on any one motion picture has been eliminated;
- a "digital media project" is now included in the definition of a "motion picture"; and
- the sunset date for the film incentives statute has been extended from January 1, 2013 to January 1, 2023.
In addition, both the payroll and production expense credits may now be refunded (at up to 90% value) to a taxpayer, at the taxpayer's election.
Health Care Reform Act
As a result of the recently enacted Massachusetts Health Care Reform Act, most Massachusetts residents age 18 and over are required to have health insurance, if it is affordable to them. Residents who have access to affordable coverage but do not obtain the coverage, or do not obtain a waiver from the mandate, may face state tax penalties pursuant to G.L. c. 111M, sec. 2. For taxable year 2007, the penalty for failing to obtain affordable coverage by December 31, 2007 is loss of the personal exemption.
New Schedule HC, Health Care Information, must be completed by all full-year residents and certain part-year residents age 18 and over to notify DOR whether or not they have health insurance, and to determine the amount of their personal exemption.
Health Savings Accounts Earnings and Deduction
For tax years beginning on or after January 1, 2005, 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. Health Savings Accounts (HSAs) are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. For calendar year 2006, the contribution limit is equal to the lesser of the health plan’s annual deductible; or $2,700 for an individual plan or $5,450 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 2006, the contribution limits for an individual age 55 or older is equal to the lesser of the health plan’s annual deductible; or $3,400 for an individual plan or $6,150 for a family plan.
Home Heating Fuel Deduction
This deduction has expired as it was allowed for taxable years 2005 and 2006 only.
Medical Savings Accounts
Archer MSAs have largely been replaced by the new Health Savings Accounts (HSAs). However, any Archer MSAs currently in existence were established under the Code in effect on January 1, 2005, and therefore will continue to be adopted for Massachusetts tax purposes. The deduction for contributions to MSAs is adopted by Massachusetts, including any inflation adjustments to the limits and maximums for deductibles.
Military Personnel Serving in a Combat Zone
Compensation received for active service in a combat zone by members of the armed forces of the United States is excluded from Massachusetts gross income. Income earned for active service for any month during which a member below the grade of commissioned officer served or was hospitalized as a result of injuries received during service in a combat zone is excluded from gross income; a portion of such income earned by commissioned officers is also excluded. Designated combat zones include/have included: the Persian Gulf, Kosovo and Afghanistan.
Massachusetts gross income is based on federal gross income. Massachusetts adopts the Internal Revenue Code as of January 1, 1998. Since the relevant federal provisions were enacted before January 1, 1998, Massachusetts excludes from income, to the same extent as the Code, compensation earned by members of the armed forces for service in a combat zone.
No Tax Status and Limited Income Credit Thresholds:
Because the income level for No Tax Status for joint filers and heads of household is based in part on the personal exemption amounts, the threshold for No Tax Status for these taxpayers has been changed to reflect changes to the personal exemptions. The Limited Income Credit calculation is similarly affected.
- Joint Filers.
No tax is imposed if the Massachusetts adjusted gross income (AGI) does not exceed $15,850 plus $1,000 per dependent. Joint filers are eligible for the Limited Income Credit if Massachusetts AGI does not exceed $27,738 plus $1,750 per dependent.
- Head of Household.
No tax is imposed if the Massachusetts AGI does not exceed $13,975 plus $1,000 per dependent. Heads of household are eligible for the Limited Income Credit if Massachusetts AGI does not exceed $24,456 plus $1,750 per dependent.
- Single Filers.
No Tax Status for single filers is unaffected by the increase in the personal exemption amount. For single filers, no tax is imposed if the taxpayer's Massachusetts AGI does not exceed $8,000. Single filers are eligible for the Limited Income Credit if Massachusetts AGI does not exceed $14,000.
Note: If married filing separately, you do not qualify for No Tax Status or the Limited Income Credit.
Pensions and Retirement Plans; Contributions, Distributions and Rollovers
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") has made the following Internal Revenue Code (Code) provisions relating to qualified plans and other tax-favored retirement plans:
- increases the federal income tax contribution limits for elective deferrals;
- provides catch-up contributions for those age 50 or older;
- increases portability between plans and accounts by expanding the rollover provisions; and
- makes several other changes related to retirement plans and accounts.
Under the Act, Massachusetts retains the reference in chapter 62 to the 1998 Code for most income tax provisions, but adopts the current Code for the treatment of qualified plans and certain other tax-favored retirement plans. Effective for tax years beginning on or after January 1, 2002, the Act conforms the Massachusetts personal income tax to the following sections of the Code as amended and in effect for the taxable year ("current Code"): IRC §§ 62(a)(1),72, 274(m) and (n), 401 to 420 inclusive (but excluding §§ 402A and 408q), 457, 529, 530, 3401 and 3405.
Personal Exemptions
Recent legislation provides that personal exemptions may increase for tax years beginning on or after January 1, 2004 if tax revenues increase. Applicable for the 2007 tax year, the personal income tax exemptions have increased from $3,850 to $4,125 for single and married filing separately filers, from $5,950 to $6,375 for head of household filers, and from $7,700 to $8,250 for joint filers.
Personal Exemptions — Health Insurance Requirement
Beginning July 1, 2007, a new Massachusetts law states that residents age 18 and over must have health insurance. With few exceptions, adults must be able to show that they have health insurance by December 31, 2007, by filing Schedule HC, Health Care Information with their Form 1 or Form 1-NR/PY.
If you have private health insurance, you will receive a Form 1099-HC, Massachusetts Health Care Coverage, from your health insurance provider. You will need certain information from this form to complete Schedule HC.
Those who cannot show that they have health insurance will lose the tax benefit of their personal exemption on their 2007 Massachusetts income tax return. This tax benefit is currently $219 for an individual taxpayer. Non-compliance penalties will increase for 2008.
Most adults already have health insurance, perhaps through their employer or a government program. If you do not have this insurance, the Commonwealth Health Connector can help you or your employer to find the right health plan. The Health Connector has new health insurance choices for you and your family. These plans carry the state’s Seal of Approval for quality and affordability. You may also purchase plans through approved Massachusetts health insurance carriers.
Real Estate Tax Credit for Persons Age 65 and Older (Circuit Breaker Credit)
Certain taxpayers age 65 or older may be eligible to claim a refundable credit on their state income taxes for the real estate taxes paid during the tax year on the residential property they own or rent in Massachusetts that is used as their principal residence. If the credit due the taxpayer exceeds the amount of the total income tax payable for the year by the taxpayer, the excess amount of the credit will be refunded to the taxpayer without interest. For tax year 2007, the maximum credit allowed for both renters and homeowners is $900.
To be eligible for the credit for the 2007 tax year: the taxpayer or spouse, if married filing jointly, must be 65 years of age or older at the close of the 2007 tax year; the taxpayer must own or rent residential property in Massachusetts and occupy the property as his or her principal residence; the taxpayer's "total income" cannot exceed $48,000 for a single filer who is not the head of a household, $60,000 for a head of household, or $72,000 for taxpayers filing jointly; and for homeowners, the assessed valuation as of January 1, 2006, before residential exemptions but after abatements, of the homeowner's personal residence cannot exceed $772,000.
Retirement Planning Services
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 sec. 401(a) plans, annuity plans, government plans, IRC sec. 403(b) annuity contracts, SEPs and SIMPLE accounts. This exclusion is due to expire for tax or plan years beginning after December 31, 2010.
Tuition and Fees Deduction
For tax years beginning on or after January 1, 2006, the Tuition and Fees Deduction has been repealed. Even if Congress extends this deduction, DOR will not adopt the extension because it will occur after January 1, 2005.
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