What Pensions Are Not Taxable in Massachusetts?
Massachusetts residents: Learn about specific pension incomes that are not taxed and how to report them on your state tax return.
Understanding how pension income is taxed can be complex, especially when state-specific rules apply. In Massachusetts, while a significant portion of retirement income is subject to state income tax, certain types of pensions are specifically exempted. Understanding these distinctions is important for financial planning. This guide clarifies which pensions are not taxable in Massachusetts.
General Rules for Massachusetts Pension Taxation
In Massachusetts, income received from most private pensions and annuity plans is generally considered taxable income for state income tax purposes. This includes distributions from common retirement vehicles such as 401(k)s, 403(b)s, and traditional Individual Retirement Accounts (IRAs) once contributions that were previously taxed by Massachusetts have been recovered. The state typically imposes a flat tax rate on most earnings, including these forms of retirement income. Therefore, retirees drawing from these types of plans should anticipate that these distributions will be included in their Massachusetts gross income, unless specifically exempted.
The general rule is that if an income stream is taxable at the federal level, it will likely be taxable in Massachusetts unless a specific state exemption applies. Massachusetts generally conforms to federal treatment for contributions, distributions, and rollovers from various qualified and workplace retirement plans. However, the state has its own set of rules that carve out specific exemptions, particularly for certain government pensions.
Exempt Pension Income Categories
Massachusetts tax law provides specific exemptions for certain types of pension income, offering significant tax relief to eligible retirees. These exemptions are primarily extended to pensions from public service, recognizing contributions to government entities.
Pensions received from the Massachusetts Contributory Retirement System are fully exempt from state income tax. This includes retirement allowances from the Commonwealth of Massachusetts and its political subdivisions, such as state and local government pensions, including those for teachers, police officers, and firefighters. These are considered contributory plans where employees contribute to the system during their working years.
Similarly, pensions from the U.S. government are generally exempt from Massachusetts state income tax. This category includes federal civil service pensions (CSRS, FERS) and U.S. Postal Service pensions. The tax-exempt status also extends to pension payments received by surviving spouses of federal employees.
Furthermore, U.S. military pensions are also not taxed in Massachusetts. This exemption applies to uniformed services retired pay, encompassing income from the armed forces and commissioned corps like the National Oceanic and Atmospheric Administration and the Public Health Service. While federal law generally taxes military retirement pay, Massachusetts has enacted specific legislation to fully exempt it from state income tax. This provides substantial financial benefit to veterans who have served in the nation’s military.
How to Report Exempt Pension Income
Even if a pension is exempt from Massachusetts state income tax, it often still needs to be reported on the tax return. Taxpayers typically receive a Form 1099-R, which details distributions from pensions, annuities, and retirement plans. This form will show the total amount of the distribution, regardless of its taxability at the state level.
When filing the Massachusetts Form 1, “Massachusetts Resident Income Tax Return,” exempt pension income is generally reported and then subtracted or excluded. For example, income from exempt government pensions that is included in the federal gross income (and thus might appear on federal Form 1040, line 5b) is then adjusted on the Massachusetts return. This adjustment ensures that the exempt portion is not subject to state tax.
Taxpayers typically indicate the exempt amount on specific lines or schedules. For instance, exempt pension income may be entered as zero on Line 4 of Form 1, with a note indicating the source of the exempt pension. While the process may vary slightly depending on the specific form version or tax software used, the general principle involves reporting the gross distribution and then claiming an exclusion or deduction for the exempt portion. Taxpayers should accurately follow instructions for Massachusetts Form 1 and any related schedules, such as Schedule X.