TIR 98-15: The Effect of the Adoption of the Updated Internal Revenue Code on the Massachusetts Personal Income Tax ("Code Update")
The Massachusetts Legislature recently enacted Chapter 319 of the Acts of 1998 which incorporated into Massachusetts personal income tax law the Internal Revenue Code (the "Code") as amended and in effect on January 1, 1998. (1) Massachusetts previously used the Code as amended and in effect on January 1, 1988. As a result of this Code update, Massachusetts will now adopt many of the federal tax law changes that have been enacted by Congress in the past ten years, including the Taxpayer Relief Act of 1997 and the Small Business Health Insurance and Welfare Reform Acts of 1996.
As a general rule, Massachusetts will not adopt any federal tax law changes incorporated into the Code after January 1, 1998. However, certain specific provisions of the personal income tax automatically adopt the current Code. These include (i) Roth IRAs, (ii) Education IRAs, (iii) the exclusion for gain on the sale of a principal residence, (iv) trade or business expenses, (v) travel expenses, (vi) meals and entertainment expenses and (vii) the maximum deferral amount of government employees’ deferred compensation plans. As explained in TIR 98-8, Massachusetts will adopt all future federal tax law changes affecting these provisions.
The effective date for Code update
adopted by Chapter 319 is June 30, 1998. The Department will apply the
Code update provisions to all returns due on or after July 1, 1998
without regard to extensions. The Department will not require any
taxpayers that filed a return based on the 1988 Code on or after July
1, 1998 and before October 6, 1998, to file an amended return and will
not challenge any amount shown on such return on the basis of the 1988
versus 1998 definition of the Code. October 6, 1998 is the date of Technical Information Release 98-8, Massachusetts 1998 Reducing Income Taxes Act ("the Act"), in which the Department first announced this effective date.
The purpose of this Technical Information Release is to explain the major changes to the Massachusetts personal income tax provisions as a result of the Code update adopted by Chapter 319.
II. Exclusions from Gross Income
As a result of the Chapter 319 Code update, all amounts which are allowed to be excluded from federal gross income under the Code as amended and in effect on January 1, 1998, will be excluded from Massachusetts gross income, unless a specific Massachusetts statutory modification adds the amounts back into Massachusetts gross income. See G.L. c. 62, § 2(a)(1) for a description of these addbacks. The items in this section are exclusions from federal gross income which will now be excluded from Massachusetts gross income. (2)
A. Savings Incentive Match Plan for Employees (SIMPLE) Accounts - IRC §§ 401(k); 408(p).
Employers who do not have an employer-sponsored retirement plan and who have 100 or fewer employees may adopt a SIMPLE plan in either IRA or IRC § 401(k) form. IRC §§ 401(k)(11); 408(p). Eligible employees make contributions to SIMPLE accounts by electing to have the employer contribute on their behalf ("elective employer contributions") a percentage of their salary. IRC §§ 401(k)(11)(B)(i)(I); 408(p)(2)(A)(i)(I). The employer must match such contributions or choose to make "nonelective" contributions on behalf of all eligible employees equaling a percentage of such employees’ salaries. IRC §§ 401(k)(11)(B)(i)(II), (B)(ii); 408(p)(2)(A)(iii), (B).
All three types of contributions to SIMPLE accounts (elective employer contributions, employer matching contributions and nonelective contributions) are excluded from federal and Massachusetts gross income. Self-employed taxpayers are eligible for the exclusion for Massachusetts purposes to the extent they are eligible for federal purposes. The Massachusetts tax treatment of Simplified Employee Pension retirement plans (SEPs), including SARSEPs and SEP-IRAs, is unaffected by the Chapter 319 Code update.
B. Qualified Transportation Fringe Benefits - IRC § 132(f)
Massachusetts will now follow IRC § 132(f), as amended and in effect on January 1, 1998. Section 132(f) excludes from an employee’s gross income employer-provided parking (up to a monthly maximum of $175 in 1998) and employer-provided vanpool benefits and transit passes (up to a combined monthly maximum of $65 in 1998). Massachusetts adopts the federal rule that allows the employee a choice between the employer-provided parking benefit or cash without nullifying the gross income exclusion. IRC § 132(f)(4). Massachusetts also adopts the federal provision which indexes the exclusion amounts for inflation. IRC § 132(f)(6).
However, Massachusetts will not adopt the amendments to IRC § 132(f) enacted on June 6, 1998 under Public Law 105-178, Transportation Equity Act for the 21st Century. One of these amendments is effective for 1998 and expands the allowance of a choice between cash and transportation benefits to include employer-provided vanpool and transit pass benefits. Therefore, if an employer gives the employee a choice between cash or vanpool and transit pass benefits, such amounts are included in the employee’s Massachusetts gross income, regardless of whether the employee chooses cash or the benefit.
C. Qualified Moving Expense Reimbursement - IRC § 132(g)
Qualified moving expenses received by an employee from an employer as payment or reimbursement of deductible moving expenses are excluded from the employee’s federal and Massachusetts gross income.
D. Employer-Provided Educational Assistance Programs - IRC § 127
paid by the employer for educational assistance for the employee are
excluded from gross income up to a maximum of $5,250 for the calendar
year. The exclusion is not allowed for graduate level courses or for
education involving sports, games or hobbies. Massachusetts adopts the
federal exclusion and the federal restrictions.
Tuition payments that are reimbursed to an employee under an employer-provided educational assistance program and excluded from gross income under IRC § 127 cannot qualify for the Massachusetts personal income tax college tuition deduction allowed under G.L. c. 62, § 3B(a)(11). The Massachusetts deduction is disallowed in the taxable year in which the tuition payments are paid, regardless of whether the excludable reimbursement is received by the employee in the same taxable year as the tuition was paid or is anticipated to be received in a subsequent taxable year. Where an employee’s anticipated reimbursement is disallowed for federal tax purposes (because the employee fails to attain the required grade), the employee may amend his or her Massachusetts personal income tax return, within the required statute of limitations, and claim the Massachusetts college tuition deduction for any portion of such reimbursement which qualified for the Massachusetts deduction (but for the anticipated federal reimbursement) in the taxable year in which it was paid.
E. Employer-Provided Adoption Assistance Programs Before 2002 - IRC § 137
Amounts paid by the employer up to a per-child maximum of $5,000 ($6,000 for U.S. special needs children), for qualified adoption expenses are excluded from federal gross income. The exclusion is gradually reduced for taxpayers with federal adjusted gross income over $75,000 and is eliminated once their adjusted gross income reaches $110,000. This exclusion will not be available for expenses paid after December 31, 2001. Massachusetts adopts the federal exclusion and the federal restrictions.
F. Employer Contributions to a Medical Savings Account ("MSA") - IRC § 106(b)(1)
Qualified employer contributions to an MSA on behalf of an eligible employee are excluded from the employee’s federal and Massachusetts gross income.
G. Distributions from an MSA - IRC § 220(f)(1)
Distributions from an MSA that are used to pay the "qualified medical expenses" of the employee or the employee’s spouse or dependents are excluded from the employee’s federal and Massachusetts gross income.
H. Energy Conservation Subsidies - IRC § 136
Homeowners can exclude from federal and Massachusetts gross income the value of public utility subsidies received for the purchase or installation of energy conservation measures. Energy conservation measures are any installations or modifications designed to reduce the consumption of electricity or natural gas or to improve management of energy demand.
I. Cancellation of Student Loans - IRC § 108(f)
The discharge of certain student loans is excluded from an individual’s federal and Massachusetts gross income if the discharge is contingent on the individual’s working for a certain period of time in certain professions for a broad group of employers. The exclusion is expanded to include cancellation of loans under nongovernment programs, as long as the loan is made under an educational organization’s program designed to encourage the students to engage in work which fulfills a public service requirement. Massachusetts updates its adoption of this federal exclusion to include the allowance of loans under nongovernment programs.
J. Exclusion for Survivor Annuity Benefits for a Law Enforcement Officer - IRC § 101(h)
Survivor annuity benefits paid on account of the death of a public safety officer killed in the line of duty are excluded from federal and Massachusetts gross income. Previously, these annuity benefits were generally included in income except to the extent amounts were contributed by, and included in the income of, the officer at the time of contribution. Massachusetts now allows the full amount of the benefits to be excluded to the same extent that they are excluded from federal gross income.
K. Accelerated Death Benefits - IRC § 101(g)
Accelerated death benefits paid under a life insurance contract (including sales or assignments to viatical settlement providers) for terminally and chronically ill insured individuals are excluded from federal and Massachusetts gross income. Previously, amounts received before death were included in gross income to the extent the amount received constituted cash value in excess of the taxpayer’s investment in the contract. Massachusetts now allows the full amount of the benefits to be excluded to the same extent as they are excluded from federal gross income.
L. Exclusion for Campus Housing Expanded to Employees of Medical Research Institutions - IRC § 119(d)(4)
Employees of an educational institution do not have to include in federal or Massachusetts gross income the fair market value of campus housing if the rent is at least five percent of the appraised value of the housing. This exclusion was expanded to include academic health centers such as hospitals or medical schools. Massachusetts updates its adoption of this federal exclusion to include employees of academic health centers.
As result of the Chapter 319 Code update, certain deductions allowed for federal tax purposes under the Code as amended and in effect on January 1, 1998, are now allowed for Massachusetts tax purposes. The items listed in this section of this TIR are deductions from federal income which are now allowed as deductions from Massachusetts income. (3)
A. Self-Employed Health Insurance Deduction - IRC § 162(l)
A federal and Massachusetts deduction is allowed for amounts paid for medical care insurance for the taxpayer and his or her spouse and dependents. The deduction gradually increases until it reaches 100% for the 2007 tax year. A deduction equal to 45% of the qualified insurance payments is allowed for the 1998 tax year. The Massachusetts deduction will equal the federal deduction for each year.
B. Interest on Student Loans - IRC §§ 62(a)(17), 221
A gradually increasing deduction is allowed for interest payments due and paid on any qualified education loan. The maximum deduction is $1,000 for 1998 and is phased out for taxpayers with federal modified adjusted gross income of $40,000 to $55,000 ($60,000 to $75,000 for joint returns). The deduction is allowed only with respect to interest paid on a qualified education loan during the first 60 months (whether or not consecutive), not including any deferral or forbearance period. G.L. c. 62, § 2(d)(1); IRC §§ 62(a)(17), 221. Massachusetts will allow a deduction for student loan interest equal to the federal deduction.
C. Moving Expenses - IRC § 217
A federal and Massachusetts deduction is allowed for IRC § 217 qualified moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.
D. Deduction for Business Expenses of State and Local GovernmentOfficials Who Are Compensated on a Fee Basis - IRC § 62(a)(2)(C)
A federal and Massachusetts deduction is allowed for employee business expenses relating to service as an official of a state or local government (or political subdivision of a state or local government) if the official is compensated in whole or in part on a fee basis. Generally, this deduction applies to officials who provide certain services to the government and who hire employees and incur expenses in connection with their official duties. However, Massachusetts continues to disallow any deduction for lobbying expenses that are disallowed as deductions for federal purposes under IRC § 162(e) and continues to disallow the federal deduction for the "per diem" travel expenses for state legislators under IRC § 162(h).
E. Jury Duty Pay Turned Over to Employer - IRC § 62(a)(13)
A federal and Massachusetts deduction is allowed for the amount of jury duty pay surrendered by an employee to his or her employer in return for the employer’s payment of compensation to the employee for the period of jury service. For both federal and Massachusetts tax purposes, taxpayers must include jury duty pay as "other income" on their tax returns.
F. Deduction for Clean-Fuel Vehicles and Certain Refueling Property - IRC §§ 62(a)(14), 179A
A federal and Massachusetts deduction is allowed for a portion of the cost of qualifying motor vehicles that use clean-burning fuel. A federal and Massachusetts deduction is also allowed, subject to certain limitations, for the cost of qualified refueling property that is used in the storage of clean-burning fuel or the delivery of clean-burning fuel into the tank of a qualifying motor vehicle. G.L. c. 62, § 2(d)(1); IRC §§ 62(a)(14), 179A. For both federal and Massachusetts tax purposes, this deduction is allowed in the tax year the property is placed in service, and will not be allowed for property placed in service after December 31, 2004. IRC § 179A(a)(1), (f).
G. Medical Savings Accounts (MSAs) - IRC § 220
A federal and Massachusetts deduction is allowed to employers that are small businesses or self-employed individuals (as determined for federal income tax purposes) for contributions to an MSA for "high deductible" health insurance. G.L. c. 62, § 2(d)(1); IRC §§ 62(a)(16), 220.
IV. Miscellaneous Code Update Provisions
The items listed in this section of this TIR have been categorized as miscellaneous Code update provisions either because they are not items of deduction or exclusion, or because they affect specific types or groups of taxpayers.
A. S Corporation Shareholders and Partners
S corporation shareholders and partners are subject to the personal income tax on their distributive share of the S corporation’s or partnership’s income. Under the general Chapter 319 Code update, S corporations and partnerships must determine their Massachusetts gross income by reference to the 1998 Code. Under the Chapter 175 automatic Code update, S corporations and partnerships must determine their allowable Massachusetts business expense deductions by reference to the current Code. The S corporation or partnership must use these amounts in determining and reporting each shareholder of partner’s distributive share of the S corporation’s or partnership’s income.
B. Contributions of Appreciated Property by a Partner - IRC § 704(c)
When a partner contributes appreciated property to a partnership and that property is distributed to another partner within seven years, the partner that contributed the property must include the built-in gain in Massachusetts gross income if it is required to be included in federal gross income. The amount of the gain that must be reported to Massachusetts is determined in the same manner as the gain reported to the IRS, except that, for Massachusetts purposes, the partner must compute the amount of gain using the property’s Massachusetts basis as provided in Chapter 62, Section 6F.
C. Constructive Sales Treatment for Appreciated Financial Positions - IRC §§ 1259 & 1233
Taxpayers are required to recognize gain at the time of entering into a constructive sale of any appreciated position in stock, partnership interest or debt instrument. Prior to the Code update, Massachusetts followed the prior federal law which did not recognize gain until the taxpayer closed the sale by returning identical property to the lender.
D. Sale Treatment for Cancellations, Lapses and Terminations - IRC § 1234A
The cancellation, lapse or termination of a right with respect to all property which is a capital asset, including interests in real property and non-actively-traded personal property, is a "sale," for Massachusetts purposes if it is for federal purposes.
E. Elective Rollover of Gain - IRC §§ 1045, 1223(15)
For both federal and Massachusetts purposes, fifty percent of the gain from the sale or exchange of qualified small business stock held for more than five years by taxpayers is excluded from income. A federal law change allows a taxpayer to make an elective rollover of gain from the sale of qualified small business stock held for more than 6 months to other qualified small business stock. As a result of the Chapter 319 Code update, Massachusetts now adopts the federal elective rollover provision.
F. Like-Kind Exchanges - IRC § 1031(h)
For both federal and Massachusetts purposes, tax-free like-kind exchange treatment is disallowed for U.S. personal property exchanged for foreign personal property.
G. $5,000 Death Benefit Exclusion Repealed - IRC § 101(b)
Under prior law, amounts up to $5,000 paid by, or on behalf of an employer to the beneficiaries or estate of a deceased employee were excludable from the recipients’ gross income if paid by reason of death. The federal law was changed to repeal this exclusion. As a result of the Chapter 319 Code update, Massachusetts now follows the federal tax treatment of death benefits.
H. Passive Activity Loss Limitation Exception for Real Estate Professionals - IRC § 469(c)(7), (i)(3)(E)(iv)
For both Massachusetts and federal tax purposes, qualified real estate professionals are not subject to the $25,000 passive activity limitations on losses from real estate activities in which they materially participate. IRC § 469(c)(7). If such taxpayers have losses from other activities which are classified as passive losses, the "professional real estate losses" cannot be used to reduce the federal adjusted gross income phaseout thresholds ($100,000 to $150,000) for purposes of determining the allowable passive loss deduction. IRC § 469(i)(3)(E)(iv). Massachusetts follows the federal tax treatment of these losses.
V. Depreciation Transaction Rules - Chapter 175 General Code Update
During the past ten years, Massachusetts has allowed depreciation deductions based on the Code as amended and in effect on January 1, 1988. Some IRC depreciation provisions have changed during this time resulting in a different allowable depreciation deduction for Massachusetts and federal purposes. For returns due on or after July 1, 1998, without regard to extensions, (4) the Massachusetts deduction for annual depreciation of business and income producing property will be the same as the annual federal depreciation deduction for such property under the Code as amended and in effect on January 1, 1998. This is so even if the aggregate amount of such Massachusetts deductions with respect to any item of property exceeds the property’s Massachusetts basis, or if there is excess Massachusetts basis remaining when the property is fully depreciated for federal purposes. When such property is sold, the Massachusetts basis will be adjusted to reflect the Massachusetts depreciation deduction and Massachusetts § 179 deduction allowed, and such basis, even if negative, will be used to determine Massachusetts gain recognized on the sale. G.L. c. 62, § 6F(2), (3).
This Technical Information Release modifies or supplements the following Public Written Statements: Technical Information Release 97-13, Personal Income Tax College Tuition Deduction; Technical Information Release 97-2, Savings Incentive Match Plan for Employees - "SIMPLE" Account; Technical Information Release 95-2, Massachusetts Income Tax Reporting of Employer Reimbursement for Moving Expenses Incurred after December 31, 1993; Technical Information Release 89-2, Massachusetts Income Tax Treatment of Passive Activity Losses Under § 469 of the Internal Revenue Code; DOR Directive 93-3, Massachusetts Income Taxation and Withholding of Employer-Reimbursement for Moving Expenses.
Bernard F. Crowley, Jr.
Acting Commissioner of Revenue
December 23, 1998
Doc # 64457
1. St. 1998, c. 319, § 6, An Act Making Appropriations for the Fiscal Year 1998 to Provide for Supplementing Certain Existing Appropriations and for Certain Other Activities and Projects.
2. This section is intended as a summary of the most important income exclusions adopted as a result of the Chapter 319 Code update. Please be advised, however, that it is not an exhaustive list of all Massachusetts income exclusions. An item that does not appear on the list may still be excluded from Massachusetts gross income if it is excluded for federal tax purposes under the Code as amended and in effect on January 1, 1998, and is not otherwise subjected to tax by any provision of Massachusetts law.
3. This section is intended as a summary of the most important income deductions adopted as a result of the Chapter 319 Code update. Please be advised, however, that it is not an exhaustive list of all Massachusetts income deductions. An item that does not appear on the list may still be deducted from Massachusetts income if it is deducted for federal tax purposes under the Code as amended and in effect on January 1, 1998, and is otherwise allowed as a Massachusetts deduction
4. The Department will not require any taxpayers that filed a return based on the 1988 Code on or after July 1, 1998 and before the date of TIR 98-8, October 6, 1998, to file an amended return and will not challenge any amount shown on such return on the basis of the 1988 versus 1998 definition of the Code. See Technical Information Release, 98-8, Massachusetts 1998 Reducing Income Taxes Act ("the Act"), for further details on this transition filing rule.