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Massachusetts/Federal Tax Differences

Massachusetts tax law is similar to but not the same as federal. When examining the differences keep these 4 considerations in mind:

  1. MA defines income by reference to the IRS Code (IRC). In current law there are 2 sets of references:
    • 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.
    • In the case of sale of principal residence, trade or business deductions, retirement plans & ROTH IRAs, the reference is always to the current code.
  2. Article 44 of the MA 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 MA cannot have a graduated income tax rate.
  3. MA does not allow federal itemized deductions.
  4. MA has several additional deductions of it’s own. An example would be medical or adoption deduction, which are specifically allowed in MA law.
  5. For more information see the Massachusetts Department of Revenue website.
A List of Common Federal/Massachusetts Tax Differences:

Item of Income or Deduction

Federal Treatment

Massachusetts Treatment
Capital Losses Deductible against gains in part against income Ð Carry forward available MA has its own treatment without regard to the Federal law
Capital Gains Calculated @ varying rates MA taxes long term gains at 5.3% and short term gains at 12%
Excess Trade or Business Deductions Does not exist federally Concept reinstated as of 1/1/96
Interest on Student Loans Allowed as a deduction against AGI on page one of the 1040 up to $3,400 Fully deductible, not limited by federal law
Adoption Expenses Federal credit Fees fully deductible in year paid
ROTH IRAs Non-deductible contribution Ð Distributions tax free MA treatment the same
Education IRAs Non-deductible contribution Ð Distributions tax free MA treatment the same
Sale of Principal Residence Excludes $250K or $500K if qualified MA treatment the same
Section 162 "Trade or Business" Expenses Deductible MA treatment the same
Section 179 Depreciation Allowable write-off in 2008 - $250K MA treatment the same
SIMPLE plans for Employees Excluded from gross income MA treatment the same
SIMPLES for the Self-employed Deducted from AGI Not allowed as a deduction
Qualified Transportation Fringe Benefits Allows employer parking, van pool, etc. MA treatment the same
Moving Expense Excluded from income Excluded from income
Employer Contributions to MSA Excluded from income Excluded from income
Self-Employed Health Insurance 100% deductible 100% deductible
Real Estate Professionals A concept allowed since 1996 Now recognized
Depreciation Federal life & rate based on code of year put into service Previously limited to code of 1998, now the depreciation will conform exactly to the federal amount
1231 Property If gain, property is taxed as if a capital asset Ð If sale is a loss it is taxed as if ordinary income subject to recapture MA law makes it a capital asset always, not subject to recapture as ordinary income

This material courtesy of Philip Dardeno, CPA MST of Reading, MA ~ 781-942-9820 Mr. Dardeno specializes in MA tax issues concerning Audits & Appeals for both Corporations and Individuals.

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