United States

Massachusetts reduces personal income tax rate; issues TCJA guidance

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Personal income tax rate reduction

On Dec. 14, 2018, the Massachusetts Department of Revenue announced that due to certain revenue metrics having been achieved, the state’s personal income tax rate for “Part B income” will be reduced to 5.05 percent, effective Jan. 1, 2019. The current tax rate for Part B income is 5.10 percent.

For Massachusetts personal income tax purposes, Part B income includes wages, salaries, and many other forms of income, including self-employment income, S corporation distributions, and rental income from personal property. Most long-term capital gains are also taxed at the rate applied to Part B income.

This is the fifth rate reduction since 2012. In its announcement, the department noted that if certain revenue metrics are met once again during 2019, the tax rate for Part B income could fall to 5 percent, effective Jan. 1, 2020.

Impact of the TCJA on personal income tax

Recently, the department also released a working draft of a Technical Information Release (TIR) explaining the impact of various provisions of the TCJA on Massachusetts personal income tax.  Several highlighted provisions of the draft are included below:

  • 20 percent pass-through deduction (section 199A):  Massachusetts adopts section 62(a)(1), as currently in effect, which pertains to certain trade or business deductions.  The TJCA provides that deductions under new section 199A are not treated as deductions under section 62(a)(1). As a result, section 199A is not allowed as a deduction under Massachusetts law
  • Re-characterization of certain capital gains for partners in a partnership (carried interest): Pursuant to the TCJA, section 1061 was amended to increase the required holding period for long-term capital gain treatment with respect to partnership interests held by investment and fund managers from more than one year to more than three years. However, since Massachusetts does not generally adopt the Internal Revenue Code as currently in effect for personal income tax purposes, the state does not conform to the amended section 1061. Thus, the the three-year holding period requirement imposed by amended section 1061 does not apply for Massachusetts personal income tax purposes

The draft TIR also addresses provisions related to alimony payments, farming losses, section 529 qualified tuition/college savings plans,  section 529A ABLE Accounts, section 83 property transfers, moving expense deduction, and gambling losses. Massachusetts personal income tax payers should anticipate revisions to this guidance before final publication.

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