Prior to 2022, Massachusetts personal income tax was based on fixed date conformity, meaning it started with federal gross income as defined by the Internal Revenue code as of 1/1/2005.  This differed from Massachusetts corporate tax which had rolling conformity, meaning the starting point was the Internal Revenue Code as currently in effect.  As part of the FY23 Budget, Massachusetts updated the law and changed the personal income tax to rolling conformity with the Internal Revenue Code as of 1/1/2022.  Since then, the Commonwealth has issued two directives to help taxpayers understand the changes this new conformity means to their Massachusetts taxable income.    In January, TIR 23-1 was issued which identified 39 Code provisions to which the Massachusetts personal income tax now conforms.  The following is a brief list of some of the more common provisions:

1. Code Sec. 61(a)(8) and 62(a)(10): Repeal of inclusion of Alimony received as gross income and repeal of deduction of alimony payments
2. Code Sec. 62(a)(2)(D): Educator’s expense deduction
3. Code Sec 83(i) Property transferred in connection with performance of services – treatment of qualified equity grants
4. Code Sec. 101(1) Treatment of certain employer-owned life insurance contracts
5. Code Sec. 132(f) Exclusion from gross income of employer-provided transportation fringe benefits
6. Code Sec. 132(g) and 217: Moving expense deduction and exclusion from gross income of qualified moving expense reimbursement.
7. Code Sec. 152: modification of definition of “Dependent”

In March of this year, the MDOR released TIR 23-5 which attempted to explain the implications of the Commonwealth’s conformity with a number of the provisions listed above.

Code Sec. 61(a)(8) and 62(a)(10): Repeal of inclusion/deduction for alimony payments

Prior to the MA code update, a taxpayer who paid alimony on a divorce decree prior to 2019 was allowed a deduction for the alimony on his/her federal return and the recipient had to recognize the income.  For divorce decrees entered into after 12/31/2018, the payor of alimony was not entitled to a deduction and the recipient did not have to recognize income on the federal return.  For Massachusetts all alimony payments were deductible and alimony income was recognized income.  However, with the adoption of the current code, MA now follows the federal treatment and only alimony paid on divorce decrees entered into prior to 1/1/2019 are deductible and only alimony received on divorces entered into prior to 1/1/2019 are reported in income. 

Code Sec. 62(a)(2)(D): Educator’s Expense Deduction

Code Sec. 62(a)(2)(D) allows an eligible educator to deduct from federal gross income unreimbursed qualified expenses (e.g. expenses for books, supplies and computer equipment used in the classroom).  Under the 2005 Code, the educator’s expense deduction was scheduled to expire on December 31, 2005.  As a result, the deduction has not been allowed for Massachusetts tax purposes since 2005.  However, the federal deduction was made permanent subsequent to 2005.  As a result of the Code Update, eligible educators may deducted qualified expenses under Code Sec. 62(a)(2)(D) as described above, for Massachusetts purposes for tax years beginning on or after January 1, 2022.  The deduction is limited to an inflation adjustment amount.  For the 2022 tax year, the deduction is limited to $300. 

Code Sec. 132(g) and 217: Moving expense deduction and exclusion from gross income

Code Sec. 217 provides a deduction for moving expenses paid or incurred during the taxable year in connection with the commencement of work by a taxpayer as an employee, or as a self-employed individual at a new principal place of work.  Code Sec. 132(g) provides an exclusion from federal gross income for any qualified moving expense reimbursement.  However, as part of the Tax Cuts and Jobs Act, both the exclusion and deductions are disallowed for tax year beginning on or before December 31, 2025 and reinstated for subsequent tax years.  Therefore for 2018 – 2021, taxpayers were no longer entitled to the federal benefits but were still allowed the benefits on their Massachusetts income tax return.  Starting January 1, 2022, Massachusetts will no longer allow most chapter 62 taxpayer to either (i) exclude qualifying move expense reimbursements from MA gross income or (ii) deduct qualified moving expenses.    

Code Sec. 1202: Partial exclusion for gain from certain small business stock

IRC Sec. 1202 excludes from federal gross income all of the gain from the sale or exchange of qualified small business stock held for more than 5 years.  This exclusion applies to small business stock applied on or after September 27, 2010.  However, under the 2005 Code, only 50% of the gain was excluded.  As a result, MA taxpayers applied the 50% federal exclusion for gain on qualifies 1202 stock .  As a result of the code update, Massachusetts conforms to the 100% exclusion with respect to sales or exchanges of qualified small business stock that occur on or after January 1, 2022.

In addition to the federal exclusion, Massachusetts taxes gain on the sale or exchange of certain small business stock at a reduced rate of 3%.  Following the Code update, the reduced rate is no longer applicable to gain that is eligible for the 100% exclusion, since the gain would no longer be included in MA gross income.  The reduced rate will continue to apply to gain that is not eligible for the federal exclusion, this would include gain from the sale of S corp stock if all other requirements for the reduced rate are met. 

Code Sec. 1400Z-1, 1400Z-2: Investments in qualified opportunity zones

IRC Sec 1400Z-2 allows taxpayer to elect to defer gain on the sale of property for federal tax purposes to the extent the gain is invested in a “Qualified Opportunity Fund” within 180 days of the sale of the original property.  Deferred gain is recognized when there is an inclusion event (e.g., sale of the interest in the QOF) or in the 2026 tax year, whichever is earlier.  The amount of the deferred gain subject to tax is reduced, if at the time the deferred gain is recognized, (i) the interest in the QOF has been held for five years or more or (ii) the value of the QOF has decreased.   If the interest in the QOF is held for ten years or more, increases in the value of the QOF are excluded from federal income when the QOF is sold. 

As a result of the Code Update, Massachusetts now conforms to IRC Sec 1400Z-2 for chapter 62 taxpayers for tax years beginning on or after January 1, 2022.  Due to previous differences in MA and Federal tax law regarding opportunity zones (See TIR 19-7), a chapter 62 taxpayer may have a different tax basis in their QOF interest for Massachusetts and federal purposes. 

If you have any questions on how these provisions or other tax provisions impact your tax situation please contact us for more information.