Massachusetts Income Tax Basics

The Bay State is one of a handful with a flat tax rate for all

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Massachusetts is part of a rare group of states when it comes to personal income tax. It's actually one of only nine states that levy a personal income tax at a flat rate.

Why does that matter? What is a flat tax in the first place? Below, we dive deep into Massachusetts income tax basics, covering the following: the Massachusetts tax rate, exemptions, deductions, tax credits, capital gains tax, and filing your tax return.

Massachusetts Tax Rate

The income of residents in Massachusetts is subject to a flat income tax rate. For 2020 tax filings, the rate is 5.0%. The Bay State will charge a 5% tax, no matter if you made $10,000 or $10,000,000.

To understand why this is significant, it helps to bring up the more common form of tax system: the progressive tax rate system. With a progressive tax rate, there are tiers of tax rates based on certain levels of income. The higher one's income, the higher the tax rate they will pay, up to a certain level.

Consider California as an example. California has a progressive tax system with 10 tiers of rates: 1%, 2%, 4%, 6%, 8%, 9.3%, 10.3%, 11.3%, 12.3%, and 13.3%. Each tier is associated with a certain taxable income level. At the low end, all income from $0 to $8,932 is taxed at 1% for 2020. At the high end, all income over $1,000,000 is taxed at 13.3%.

In Massachusetts, these income levels would be taxed at a flat rate of 5%. Everyone pays the same tax rate, except for those with very limited incomes, who pay nothing.

Massachusetts Taxable Income

Massachusetts generally follows the federal rules for taxable income but has a few exceptions. Interest income from any state and local bonds issued outside of Massachusetts is taxable, even though it's not taxed on your federal return.

Likewise, income from foreign sources that might be excluded from your federal return is taxable in Massachusetts. 

Massachusetts does not tax retirement income from federal or state government pensions. Social Security benefits are also exempt, along with disability income resulting from an injury related to military action or a terrorist attack. 

Massachusetts imposes no state tax on those with very low incomes. In tax year 2020, this amounts to $8,000 for single filers, $14,400 plus $1,000 per dependent for head-of-household filers, and $16,400 plus $1,000 per dependent for married couples filing jointly.

A list of federal deductions, both allowed and disallowed in calculating Massachusetts adjusted gross income, is available from the Massachusetts Department of Revenue.

Massachusetts Tax Exemptions

Similar to deductions, exemptions also reduce your taxable income. Here are several exemptions in Massachusetts to take advantage of.

  • Blindness exemption: A $2,200 exemption if you or your spouse is legally blind
  • Dependent exemption: A $1,000 exemption for each dependent
  • Medical/dental exemption: An exemption for the federally deductible portion of your medical and dental expenses
  • Age 65-or-over exemption: A $700 exemption for being 65 or older
  • Personal exemption: A personal exemption based on income and filing status

Massachusetts Tax Deductions

Massachusetts allows you to take many of your federal above-the-line deductions on your state return to arrive at a lower adjusted gross income (AGI) for tax-calculation purposes. However, IRA contributions are not deductible above the line, which means you are taxed on any contributions made. As of tax year 2020, the state offered no standard deduction.

Deductions such as student loan interest, moving expenses, and college tuition are allowed on your Massachusetts return.

Other items that are deductible include:

  • Child care/disabled dependent care: You can deduct amounts paid for childcare or the care of a disabled dependent or spouse so that you can work or look for work. The maximum deduction is $4,800 for one qualifying dependent, or $9,600 for two or more dependents as of tax year 2020.
  • 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 one dependent. The maximum deduction is $7,200 for two or more dependents. You can take this deduction or the deduction for child/dependent care, whichever is greater. You can't take both.
  • Retirement contributions: A deduction of $2,000 each is available to taxpayers and their spouses for contributions made to Social Security, railroad, U.S. government, or Massachusetts retirement plans. Medicare premiums deducted from retirement payments are not deductible.
  • Rent deduction: You can receive a deduction for up to 50% of rent paid during the year for a total deduction not to exceed $3,000 as of 2020.
  • Commuter deduction: Individuals can deduct commuting costs, including tolls paid and the cost of transit passes, but only when they exceed $150 per year. The maximum commuter deduction is $750 per person. 

Massachusetts Tax Credits

Tax credits are subtracted from the tax you owe, and some of them are refundable, which means the state will refund to you any portion of the credit left over after subtracting the tax you owe. The following credits are available in Massachusetts:

  • Earned Income Credit: This credit is refundable and can be claimed for 30% of your federal earned income tax credit (EITC) as of tax year 2020.

In 2021, the American Rescue Plan expanded eligibility for the federal EITC in response to economic hardships caused by the COVID-19 pandemic, so you may be eligible when you file your 2020 taxes even if you were not in previous years.

  • Limited Income Credit: Those who meet certain income thresholds can qualify for the Limited Income Credit (LIC). The amount depends on your adjusted gross income (AGI) after taking above-the-line deductions, and it also depends on your filing status. AGI limits as of tax year 2020 are $14,000 for single filers, $25,200 plus $1,750 per dependent for those who qualify as head of household, and $28,700 plus $1,750 per dependent for married couples who file jointly.
  • Real Estate Tax Credit: This credit is refundable as well. Certain taxpayers ages 65 or older can claim this credit for real estate taxes paid on a home 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 must use 25% of their yearly rent instead of property tax payments.

Additional credits, such as one for income taxes paid to another state and one for renewable energy, are also available.

Under the Massachusetts Health Care Reform Law, you must report information relating to your health insurance coverage on your tax return. You might have to pay penalties to the state if you did not have insurance for all or part of the year.

Massachusetts Capital Gains Tax Rates

Massachusetts taxes all income at a flat rate of 5% in tax year 2020, with the exception of short-term capital gains. 

Short-term capital gains are those from the sale of assets you've owned for less than one year. These are taxed at 12%. Long-term capital gains for assets held for one year or more are taxed as ordinary income at the regular 5% rate for 2020.

Filing Your Return

All residents with a gross income greater than $8,000, and nonresidents whose income exceeds the lesser of $8,000 or the prorated personal exemption, are required to file a Massachusetts income tax return.

Returns are ordinarily due April 15 (May 17, 2021, for filing 2020 tax returns), and you can file on paper or electronically. 

The state has a free e-file program called ​​MassTaxConnect, or you can file electronically through state-approved tax practitioners, websites, or software. If you prefer to file on paper, forms are available online.

Key Takeaways

  • Massachusetts implements a 5% flat tax rate and is one of only nine states with a flat tax rate.
  • Taxes can be reduced in Massachusetts through a variety of exemptions, deductions, and tax credits.
  • Short-term capital gains are taxed at 12% in Massachusetts.
  • Unless stated otherwise, returns need to be filed by April 15. In 2021, they are due May 17.