| Date: | 12/17/1999 |
|---|---|
| Organization: | Massachusetts Department of Revenue |
| Referenced Sources: | Massachusetts General Laws |
Tax Administration/Personal Income Tax
December 17, 1999
This Technical Information Release (TIR) explains several provisions contained in Chapter 127 of the Acts of 1999, "An Act making appropriations for the Fiscal Year 2000." (The "Act"). Changes to the tax on capital gains, which provide new and expanded loss offset rules, are found in TIR 99-17. The revised rules eliminating the so-called "pay-to-play" provisions, providing a taxpayer the right to withhold payment of certain disputed taxes, are described in TIR 99-18.
I. Budgetary provisions that affect personal income taxes
A. Changes effective for tax years beginning on or after January 1, 1999
1. Changes to the Septic Credit calculation
Massachusetts allows taxpayers a credit against personal income taxes for costs incurred in the design and construction of a septic system that conforms to the requirements of the State Environmental Code, Title 5, 310 CMR 15.000 et seq. (1995). The Act slightly modifies the current method used for calculating the credit. Under the existing statute, the amount of the credit is reduced by the amount of any interest subsidy on a below market rate loan, or by any grant, that a taxpayer used to finance the septic system construction. G.L. c. 62, § 6 (i). The amount of the interest subsidy is calculated in two steps. The first figure is the interest the taxpayer would have paid at the time the credit is claimed using the interest rate set out in G.L. c. 62C, § 32(a). From that is subtracted the interest that the taxpayer has actually paid at the time the credit is claimed using the subsidized rate. TIR 97-12. The Act provides that the rate the taxpayer would have paid should be determined using a single annualized rate. St. 1999, c. 127, § 281. See TIR 99-20 for a discussion of this change to the calculation of the septic credit.
2. Volunteer services by persons over age 60
The Act adds a new section to the local property tax statute (G.L. c. 59, § 5K) that allows a city or town to establish a program which provides persons over age 60 with a reduction in local property taxes, up to $500, in exchange for volunteer services. St. 1999, c. 127, § 59. The Act provides that this local property tax benefit should not be counted as income or wages for Massachusetts income tax purposes. Id.
B. Changes effective for tax years beginning on or after January 1, 2000
Reduction in Part B income tax rates
The Act reduces the tax rate on Part B income, found at G.L. c. 62, § 4, in three stages. St. 1999, c. 127, §§ 73, 74, 75. The rate is reduced from 5.95% to 5.85%, for the calendar year beginning January 1, 2000; from 5.85% to 5.80% for the calendar year beginning January 1, 2001; and from 5.80% to 5.75% for tax years beginning on or after January 1, 2002. St. 1999, c. 127, §§ 372, 373, 374. This rate will also apply to Part A taxable interest and dividends income. G.L. c. 62, § 4 (a)(2), applicable to tax years beginning on or after January 1, 2000.
C. Changes effective for tax years beginning on or after January 1, 2001
1. Increase in the student loan interest deduction
Before the Act, interest payments on educational debt could be deducted from Part B adjusted gross income based on the federal rule which limited the deduction to $1,000. G.L. c. 62, § 2(d)(1). The Act expands the deduction to the full amount of the interest, no longer limiting the amount to the federal deduction. St. 1999, c. 127, § 71 (to be codified at G.L. c. 62, § 3(B)(a)(12)). To be eligible for the deduction, the "educational debt" must be a loan that is administered by the financial aid office of a two-year or four-year college at which the taxpayer, or the taxpayer's qualified dependent, was enrolled as an undergraduate student. Additionally, the loan must have been secured through a state student loan program, a federal student loan program, or a commercial lender, and must have been spent solely for the purposes of paying tuition and other expenses directly related to the school enrollment.
2. Increase in exemption for adoption agency fees
The existing exemption against Part B adjusted gross income for fees paid within a taxable year to a licensed adoption agency for the adoption of a child is increased. The former exemption was limited to fees that exceeded 3% of the taxpayer's Part B adjusted gross income. G.L. c. 62, § 3 (B)(b)(5). Under the Act, the exemption extends to the full amount of the fees paid. St. 1999, c. 127, § 72. Modifies LR 88-12, Adoption Expenses Qualifying for Exemption Under G.L. c. 62, § 3(B)(b)(5).
3. Increase in the earned income credit
The Act increases the Earned Income Credit, G.L. c. 62, § 6 (h) from 10% to 15% of the federal credit. St. 1999, c. 127, § 79. The Earned Income Credit is a credit available to certain low-income individuals who have earned income, such as wages or income from self employment, or other income, such as capital gains or investment income, that does not exceed established thresholds. I.R.C. § 32.
4. Credit for real estate taxes paid for persons age 65 and older (known as the "circuit breaker")
The Act establishes a new credit against income tax for persons 65 and older for a portion of real estate taxes paid, whether by a homeowner or a tenant. The credit is equal to the amount by which the real estate tax payment or the rent constituting the real estate tax payment exceeds ten percent of the taxpayer's total income, subject to limitations by the claimant's total income and the assessed value of the real estate. St. 1999, c. 127, §§ 80, 81 (to be codified at G.L. c. 62, § 6 (k)). A taxpayer's "total income" is the taxpayer's adjusted gross income increased by various amounts that may have been excluded or subtracted from the taxpayer's adjusted gross income, such as income from social security, retirement, or annuities, cash public assistance, net capital losses or Part C losses, and certain other deductions. Id. This total income figure is also reduced by certain exemptions found at G.L. c. 62, § 3. Id. The credit is available to persons whose total income does not exceed $40,000 for a single person, $50,000 for a head of household, or $60,000 for taxpayers married filing jointly. St. 1999, c. 127, § 80. The credit is also only available if the assessed valuation on the residence does not exceed $400,000. Id. The maximum credit for the tax year beginning January 1, 2001 is $375. St. 1999, c. 127, §§ 80, 387. The maximum credit for tax years beginning on or after January 1, 2002 is $750. St. 1999, c. 127, §§ 81, 388. The maximum figures for income limits, property valuation, and the credit itself are to be adjusted annually to reflect increases in the cost of living. St. 1999, c. 127, § 80.
5. A new low income housing credit
A new "low-income housing credit" will be available to individual taxpayers and partnerships (see section II.(B) below for its applicability to corporations). St. 1999, c. 127, § 82 (to be codified at G.L. c. 62, § 6I). The Department of Housing and Community Development will allocate the low income housing credit from a pool of available credits granted under section 42 of the Internal Revenue Code among qualified low income housing projects. A taxpayer allocated a federal low-income housing credit may also be eligible for a state credit based on the credit amount allocated to a low-income housing project that the taxpayer owns. St. 1999, c. 127, § 82.
6. Increase in the deduction for employment-related child and dependent care expenses
Before the Act, a taxpayer was allowed a deduction from Part B adjusted gross income for employment-related child and dependent care expenses, based on the federal credit found at I.R.C. § 21. G.L. c. 62, § 3(B)(a)(7). Employment-related expenses are certain expenses incurred to enable a taxpayer to be gainfully employed while caring for qualified individuals. I.R.C. § 21(b)(2)(A). By the Act, a taxpayer may now exceed the federal limit on those expenses for the deduction from Massachusetts adjusted gross income. For the period from January 1, 2001 to December 31, 2001, the maximum deduction is $3,600 for one qualifying individual, and $7,200 for two or more qualifying individuals. For periods on or after January 1, 2002 the deduction is up to $4,800 for one qualifying individual and $9,600 for two or more qualifying individuals. St. 1999, c. 127, § 68. Modifies TIR 90-4, The Massachusetts Income Tax Effect of Changes in the Internal Revenue Code Regarding Employer-Provided Educational Assistance and Legal Services, Student Dependents, Child Care Expenses, and Long-Term Contracts; LR 83-76, Child Care Deduction for Non-Residents.
7. Expansion and increase in the deduction from Part B income for dependents
The Act makes two major changes to the existing deduction from Part B adjusted gross income for taxpayers that have at least one dependent under the age of twelve. G.L. c. 62, § 3 (B)(a)(8). Beginning January 1, 2001, the deduction is increased and extends both to households with children under the age of twelve (the existing deduction), and to households with eligible elderly or disabled members who qualify as dependents under I.R.C. section 152. St. 1999, c. 127, § 69. The deduction, currently $1,200, is increased to $2,400 for a single dependent, and to $4,800 for two or more dependents, for the period January 1, 2001 to December 31, 2001. The deduction increases to $3,600 for a single dependent and $7,200 for two or more dependents for periods on or after January 1, 2002.
8. Increase in the rental deduction
The existing deduction from Part B adjusted gross income for rent paid for a principal place of residence is increased, from the current maximum of $2,500 to a maximum of $3,000. St. 1999, c. 127, § 70 (to be codified at G.L. c. 62, § 3 (B)(a)(9)). Modifies 830 CMR 62.3.1, Rent Deduction; TIR 86-5, Rental Deduction (Married Couples) Filing Jointly and Separately; DD 86-17, Rental Deduction (Single Filers Renting Jointly); DD 86-26, Rental Deduction (Non-Residents); LR 82-33, Rent Deduction: Home for the Elderly; LR 82-34, Rent Deduction: Nursing Home; LR 82-63, Legal Separation: Filing Status, Rent Deduction; LR 85-29, Rental Deduction for Married Couples.
II. Budgetary provisions that affect the corporate excise
A. Extension of the current 3% investment tax credit for corporations
The Act continues the existing 3% investment tax credit (ITC) for certain corporations, found at G.L. c. 63, § 31A. This credit was formerly scheduled to decline to 1% for tax years beginning on or after July 1, 1999. The 3% ITC will continue through taxable years ending on or before December 31, 2003. The 1% ITC will begin for taxable years beginning on or after January 1, 2004, unless the 3% ITC is further extended. See G.L. c. 63, § 31A (k), (l), as amended by St. 1999, c. 127, § 88. This provision is effective July 1, 1999. St. 1999, c. 127, § 390. Modifies TIR 87-2, Computation of the Massachusetts Investment Tax Credit after the Tax Reform Act of 1986; TIR 99-8, The Effect of Cargill, Inc., on the Investment Tax Credit Under G.L. c. 63, § 31A; LR 84-100, ACRS; Incentive Stock Options; Investment Tax Credit Carryforward; Withholding on Personal Service Contracts; Estimated tax.
B. A new low income housing credit
A new "low-income housing credit" will be available to corporations (see section I.(C)(5) above for its applicability to individual taxpayers and partnerships). St. 1999, c. 127, § 90 (to be codified at G.L. c. 63, § 31H). The Department of Housing and Community Development will allocate the low income housing credit from a pool of available credits granted under section 42 of the Internal Revenue Code among qualified low income housing projects. A taxpayer allocated a federal low-income housing credit may also be eligible for a state credit based on the credit amount allocated to a low-income housing project that the taxpayer owns. St. 1999, c. 127, § 90. The credit is effective for tax years beginning on or after January 1, 2001. St. 1999, c. 127, § 378.
C. Taxation of a Massachusetts bank that is organized as a partnership
The 1995 amendments to the financial institution excise law included a grandfather clause under which certain taxpayers formerly subject to the personal income tax or formerly taxed as business corporations would retain their former status until 1999, and would not be taxed as financial institutions. [1] See generally G.L. c. 63, §§ 1-2A. Sections 78 and 196 of the Act extend this grandfather clause indefinitely to certain partnerships. A partnership continues to be exempt from the financial institution excise if all of the following conditions are met:
(a) as of January 1, 1995, the partnership was subject to supervision and examination by the Commissioner of Banks;
(b) the partners have been subject to tax on income from the partnership under G.L. c. 62; and,
(c) the partners have actually been filing income tax returns under G.L. c. 62.
Under these conditions, no tax is to be paid by the partnership as an entity, but the partners continue to be subject to tax on their income from the partnership under G.L. c. 62. St. 1999, c. 127, § 78.
In order for non-resident partners in a partnership subject to the grandfather clause found in section 196 of the Act to properly apportion their partnership income to Massachusetts, sections 78 and 196 of the Act require non-resident partners to apply the apportionment rules from the financial institution excise to their partnership income. See G.L. c. 63, §§ 1-2A. These provisions are effective for tax years beginning on or after January 1, 1999. St. 1999, c. 127, § 386. Modifies TIR 95-6, Statutory Changes in Taxation of Financial Institutions: Estimated Payments for the 1995 Tax Year.
III. Budgetary provisions that affect the sales and use tax
A. Sales of photocopies by non-profit libraries
The Act creates a new exclusion from the definition of "sale" subject to sales and use taxes, found at G.L. c. 64H, § 1. The furnishing of photocopied information by libraries that are tax exempt under I.R.C. § 501(c)(3) is not a sale subject to tax. St. 1999, c. 127, § 91. This provision will apply to sales on or after January 1, 2000. St. 1999, c. 127, § 383.
B. Sales of commercial gun safes and trigger lock devices
The Act creates a new sales and use tax exemption for commercial gun safes and trigger lock devices. St. 1999, c. 127, § 92 (to be codified at G.L. c. 64H, § 6 (rr)). This provision will apply to sales on or after January 1, 2000. St. 1999, c. 127, § 383.
/s/ Frederick A. Laskey
Frederick A. Laskey,
Commissioner of Revenue
December 17, 1999
TIR 99-19