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TIR: 04-25: Effect of Recent Legislation on the Personal Income Tax, Withholding of Tax, and the Declaration of Estimated Tax by Individuals

I.  Introduction

This Technical Information Release (TIR) explains several provisions in recent legislation that amend the personal income tax, including provisions that affect the taxation of corporate trusts, allow a new commuter deduction, authorize a new obligation to withhold and remit personal income tax, and change the requirements for payment of estimated taxes. In addition, this TIR announces the Legislature’s enactment of provisions regarding the change in the capital gains tax rate for the 2002 tax year as well as the pending litigation involving the rate change.

II.  Corporate Trusts

Adjusted Gross Income. In general, the Massachusetts adjusted gross income of a corporate trust[1] is redetermined as if it were a resident natural person. G.L. c. 62, § 8(a). Under the prior version of § 8(a), in determining its Massachusetts adjusted gross income, a corporate trust was considered a corporation for purposes of any determination involving §§ 351 – 368 of the Internal Revenue Code. The Act extends to corporate trusts an expanded set of rules in the Internal Revenue Code that apply to corporations. Under the new law, in determining its Massachusetts adjusted gross income, a corporate trust will be considered a corporation for purposes of any determination involving sections 311, 312, 332 to 338, inclusive, or 346 to 368, inclusive, of the Code. St. 2004, c. 262, § 12, amending G.L. c. 62, § 8(a). See also TIR 04-22.

Allocation and Apportionment. In computing the taxable income of a corporate trust, the taxpayer must apply the apportionment percentage used in the net income measure of the corporate excise to its Massachusetts adjusted gross income. The Act amends the corporate trust provisions to incorporate a change made to the corporate excise at G.L. c. 63, § 38(b) that requires allocation of certain income to Massachusetts.  By adopting newly amended G.L. c. 63, § 38(b) for the taxation of corporate trusts, the portion of the taxable net income of a corporate trust that a non-domiciliary state is prohibited from taxing under the United States Constitution must be allocated in full to the Commonwealth if the commercial domicile of the corporate trust is in Massachusetts.  St. 2004, c. 262, § 12, amending G.L. c. 62, § 8(a). The effect of the new law is that income of a Massachusetts corporate trust that may not be taxed in other states because of U.S. Constitutional constraints will be taxable in Massachusetts in its entirety if the commercial domicile of the corporate trust is in Massachusetts. See also TIR 04-22.

Holding Companies.  Prior to amendment by the Act, Massachusetts law provided an exemption from taxation for certain corporate trusts that owned stock in affiliated companies and otherwise met the definition at G.L. c. 62, § 8(b)(ii) for “holding company.” In general, the Act eliminates the

exemption for a corporate trust that is a holding company.  However, the exemption from taxation is retained if the corporate trust was a holding company under the terms of G.L. c. 62, § 8(b) as in effect on December 31, 2003, and on such date the corporate trust was a holding company under the Public Utility Holding Company Act of 1935.  St. 2004, c. 262, § 13, amending G.L. c. 62, § 8(b).

The above changes to the taxation of corporate trusts are effective for tax years beginning on or after January 1, 2004.

III. Individuals

Commuter Deduction. Section 165 of chapter 352 of the Acts of 2004 provides:

. . . [T]here shall be deducted from Part B adjusted gross income in determining Part B taxable income, under chapter 62 of the General Laws, amounts expended by an individual for tolls paid for through a FastLane account or for weekly or monthly transit commuter passes for MBTA transit or commuter rail, not including amounts reimbursed by an employer or otherwise. In the case of a single person or a married person filing a separate return or a head of household, as defined in chapter 62 of the General Laws, filing a separate return, this deduction shall apply only to the portion of such expended amount that exceeds $150, and the total amount deducted shall not exceed $750. In the case of a married couple filing a joint return, this deduction shall apply only to the portion of such amount expended by each individual that exceeds $150, and the total amount deducted shall not exceed $750 for each individual.[2]

Double Tax Benefits Not Allowed. The new commuter deduction is allowable only if the amount is not otherwise deducted. Where commuter costs are deductible both under St. 2004, c. 352, § 165 and any other provision of law, the same expenses cannot be deducted twice.

Married Filing Jointly. In the case of married taxpayers filing jointly, each spouse is limited to his or her own commuter costs not to exceed a deduction of $750 per individual. One spouse cannot transfer his or her excess deduction to the other spouse. 

Recordkeeping. Credit card statements, bank statements, pay stubs, and similar records will serve to substantiate this deduction.

IV.  Withholding of Personal Income Tax

Withholding of Personal Income Tax by Persons other than Employers. In general, entertainers, participants in certain athletic events and other individuals who are compensated for appearances or events in the Commonwealth are subject to tax on their earnings attributable to such activities. Under prior law, where event payments were made to independent contractors rather than employees, the promoter of the event was not required to withhold personal income tax. Also, since the promoter was not required to withhold, it was sometimes necessary for the Department to enforce compliance with the income tax obligation of an entertainer, athlete or public speaker while the person was present in the Commonwealth for the event.

Effective August 9, 2004, the Act authorizes the Commissioner to require persons other than employers (1) to deduct and withhold taxes from payments made by such persons to residents, nonresidents and part-year residents of Massachusetts, (2) to file withholding returns as prescribed by the Commissioner, and (3) to pay over to the Commissioner, or to a depositary designated by the Commissioner, the taxes so required to be deducted and withheld. The Act provides an exception for certain payments of $10,000 or less. Any corporation, foundation, organization or institution that is exempt from federal taxation under § 501(c)(3) of the Internal Revenue Code is not required to withhold taxes from persons who are not employees, except where the payments made by the exempt person for a particular performance or other event exceed $10,000. St. 2004, c. 262, § 21, amending G.L. c. 62B, § 2.

Effective January 1, 2005, promoters and other persons making payments for events in the Commonwealth must register online for withholding tax at WebFile for Business (“WFB”) at The promoter or other person making event payments must withhold state income taxes at the rate of 5.3% from the entertainer, athlete, or other event participant, and remit those taxes with the appropriate form in a timely manner. For purposes of the withholding requirement for event payments, payments subject to withholding include, among other things, amounts paid in connection with a performance, an entertainment or athletic event, a speech or a seminar.

The Department will be issuing a public written statement in the near future setting forth more detailed rules for withholding of personal income tax by promoters and other persons making payments for events. The new withholding law is not restricted to promoters and similar persons. At a future time, the Department may require withholding under G.L. c. 62B, § 2 for persons other than those making payments for events. The Department will announce prospectively any additional withholding obligations and requirements.

Withholding upon Winnings.  In general, the federal threshold for withholding upon winnings is $5,000. Under prior law, Massachusetts adopted the federal threshold. Effective December 1, 2004, the Act sets the threshold for withholding upon winnings at $600.  St. 2004, c. 262, § 22, amending G.L. c. 62B, § 2.

V.  Declaration of Estimated Personal Income Tax

Under prior law, a taxpayer was required to file a declaration of estimated tax for the taxable year if the taxpayer reasonably expected to receive income that is taxable under chapter 62 from sources other than wages upon which a tax is required to be withheld. No declaration was required if the amount of estimated tax was $200 or less.

The Act raises the threshold for the filing of estimated taxes from $200 to $400 of tax. Also, the Act amends the provision imposing an addition to tax for underpayment of estimated tax to reflect the increased threshold of $400. Effective for tax years beginning on or after January 1, 2005, these changes apply to individual taxpayers and taxpayers that file Form 2, Form 3F or Form 3M. St. 2004, c. 262, § 23 and 24, amending G.L. c. 62B, §§ 13 and 14.

VI.  Tax Year 2002 Capital Gains Tax Rate

Effective for tax years beginning on or after January 1, 2002, the Legislature enacted changes regarding the income tax treatment of capital gains and losses under chapter 62.  See St. 2002, c. 186, and St. 2002, c. 364. This legislation set May 1, 2002, as the effective date for the provision changing the rate of taxation on long-term capital gains. Subsequently, the Supreme Judicial Court held that the May 1, 2002, effective date violated article 44 of the Amendments to the Massachusetts Constitution. E. Joel Peterson, et al. v. Commissioner of Revenue, 441 Mass. 420 (2004). In the Peterson case, the Court ruled that the uniformity requirement of article 44 requires that "a single tax rate must be applied to income from the same class of property received during the period specified by the legislature for measuring income."  May 1, 2002, was stricken as the effective date, and the case was remanded for a determination of whether the effective date of the rate change should be January 1, 2002, or January 1, 2003.

As part of chapter 149 of the Acts of 2004, the Legislature enacted provisions to address the effective date of the tax rate change for long-term capital gains.  St. 2004, c. 149, §§ 413, 414.  The amendments in chapter 149 shift the effective date back to January 1, 2002. However, the law also provides that the Commissioner of Revenue will not adjust the tax liability with respect to capital gains for the period January 1, 2002 to April 30, 2002 for any taxpayer who, before the effective date of the Act, paid that liability in full for capital gains realized between January 1, 2002 and April 30, 2002, inclusive.

The Legislature’s response to the Peterson ruling is being considered in the pending litigation. The original plaintiffs in the Peterson case are contesting the constitutionality of sections 413 and 414 of chapter 149 under the Massachusetts and U.S. Constitutions.  These matters have not yet been resolved.

 /s/Alan LeBovidge                     

Alan LeBovidge,

Commissioner of Revenue




October 26, 2004

TIR 04-25

[1] A “corporate trust” is any partnership, association or trust, the beneficial interest of which is represented by transferable shares.  G.L. c. 62, § 1(j).

[2] The effective date for the commuter deduction requires a technical correction. As adopted, the deduction is available for taxable years beginning after January 1, 2004, but before January 1, 2005. The Department understands that the Legislature intends to enact corrective legislation whereby the commuter deduction will be effective for the 2004 calendar year.