Massachusetts income tax is levied at a flat rate of 5.3%, and the Bay State is one of only a handful of states that allow same-sex couples to file joint income tax returns.
Taxable Income in Massachusetts
Massachusetts generally follows the federal rules for taxable income, with a few exceptions. Although not taxed on your federal return, interest income from state and local bonds (other than MA bonds) are taxable in Massachusetts. Income from foreign sources that may be excluded on your federal return is also taxable in Massachusetts. However, retirement income from government pensions (federal or state) as well as Social Security benefits are not taxable by the state. Disability income resulting from an injury related to military action or a terrorist attack is also not taxable.
A complete list of items that are taxable on your federal return, but are not taxable in Massachusetts (and vice versa) is available on the Massachusetts Department of Revenue website.
Massachusetts Tax Exemptions
Exemptions reduce your taxable income, much like deductions. Massachusetts has many exemptions. You can receive a $2,200 exemption if you or your spouse is legally blind, a $1,000 exemption for each dependent, an exemption for the federally deductible portion of medical and dental expenses, a $700 exemption for being 65 or older, and a personal exemption based on income and filing status.
Massachusetts allows you to take many of your federal above-the-line deductions on your state return with one notable exception. IRA contributions are not deductible in Massachusetts. Deductions such as student loan interest, alimony, moving expenses, and college tuition, among others, are allowed on your Massachusetts return. Other items that are deductible on your Massachusetts tax return are:
- Child care/disabled dependent care: You can deduct amounts paid for childcare or for the care of a disabled dependent or spouse so that you can work or look for work. The maximum amount of the deduction is $9,600.
- Dependent deduction: A deduction is allowed for dependents under 12 years old, dependents 65 years or older, or disabled dependents. The deduction amount is $3,600 for each dependent, with the maximum deduction being $7,200. You can either take this deduction or the deduction for child/dependent care, whichever is greater. You cannot take both.
- Retirement contributions: A deduction of $2,000 each is available to taxpayers and their spouses for contributions to Social Security, Medicare, Railroad, U.S. government or Massachusetts Retirement plans. Medicare contributions are not deductible.
- Rent deduction: You can receive a deduction for half of your rent paid during the year, up to a maximum of $3,000.
- Commuter deduction: individuals can deduct commuting costs including tolls paid and the cost of transit passes. Only expenses that exceed $150 per year are deductible and the maximum deduction amount is $750 per person.
Massachusetts Income Tax Rates
Massachusetts taxes all income at a flat rate of 5.3% with the exception of short-term capital gains. Short-term capital gains are gains from the sale of assets that have been owned for less than one year. Short-term capital gains are taxed at 12%. Long-term capital gains (for assets held for one year or more) are taxed at the regular 5.3% rate.
Massachusetts Tax Credits
Tax credits are subtracted from the tax you owe, and some of them are refundable, meaning you can be refunded any leftover credit amount after subtracting your tax due. The following credits are available in Massachusetts:
- Earned Income Credit: This credit is refundable and can be claimed for 15% of your Federal Earned Income Credit (EIC).
- Limited Income Credit: Those who meet certain income threshholds can qualify for the Limited Income Credit (LIC). The amount of this credit depends on income and filing status.
- Real Estate Tax Credit: This credit is refundable. Certain taxpayers aged 65 or older can claim this credit for real estate taxes paid on their home that they own or rent as their principal residence. The credit is equal to the amount by which property tax payments exceed 10% of their total income for the tax year. Renters use 25% of their yearly rent instead of property tax payments.
Additional credits such as a credit for taxes paid to another state and credits for renewable energy are also available.
Health Insurance Reporting
Under the Massachusetts Health Care Reform Law, you have to report information relating to your health insurance coverage on your tax return. If you did not have insurance for all or part of the year, you may have to pay penalties to the state.
Filing Your Return
You are required to file a Massachusetts income tax return if your gross income (income before deductions) is over $8,000. Returns are due April 15th and you can file on paper or electronically. The state has a free e-file program called Webfile or you can file electronically through state approved tax practitioners, websites, or software. If you prefer to file on paper, forms are available online.
A Note for Same-Sex Couples
Same-sex couples who are married must file their Massachusetts return as either married filing separately or married filing jointly. The state recognizes valid same-sex marriages only for tax periods that end on or after May 16, 2004.
Married same-sex couples are not yet allowed to file joint federal returns. Each spouse will have to file their own tax return with the IRS using the appropriate filing status (usually single or head of household). However, in order to complete the Massachusetts joint return, same-sex couples have to fill out a dummy federal return as if they were filing jointly for federal purposes. This "as if" federal return is the basis for the Massachusetts joint return and is only used for state calculations. It should not be filed with the IRS.