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January 12, 2006
MASSACHUSETTS INCOME TAX UPDATE
Before I get into this weeks article I want to give you an update on the Federal proposed changes to the Medicaid system. It appears that the proposed severe restrictions on seniors ability to make gifts will be delayed until the end of January or possibly the beginning of February.
My latest news indicates that the U.S. House of Representatives will reconvene for the 2nd session on January 31, 2006, with votes scheduled for 6:30 PM. The House will apparently be in session for voting also on February 1 and then not again until February 7 and 8. Thus, it appears that enactment of the Medicaid changes is very unlikely before January 31, 2006.
The cuts are so drastic it seems beyond belief that they could ever be enacted. The last time the House voted on these provisions they were passed by a vote of 212-206. Could they have not really understood what they were voting on? It appears that many of the members of the House had only 4 hours to review a complex 774 page package of provisions and simply voted along party lines.
What does this mean for seniors? It means that if you have been considering protecting some of your assets for your loved ones in case you need long term care, now is the time to do it! If you make changes prior to the enactment of the new Federal laws, you will be subject to the current more favorable laws.
Now to this weeks article. On December 20, 2005, the Massachusetts Department of Revenue released Technical Information Release 05-16. The substance of this release says that Massachusetts will now adopt the Internal Revenue Code as of January 1, 2005. For the past several years, Massachusetts has been using the Internal Revenue Code as of January 1, 1998.
As a result of the Code Update, certain deductions allowed for federal tax purposes are now allowed for Massachusetts tax purposes. Here are a few of the new deductions that will be available to Massachusetts taxpayers:
HEALTH SAVINGS ACCOUNTS – There are various health savings accounts available. A deduction of up to $5,250 is available to families, even if you do not itemize. To be eligible you must have a high deductible health plan, not be enrolled with Medicare and not be claimed as a dependent on someone else’s tax return. A high deductible health plan is defined as one that has a minimum deductible of $2,000 with a maximum annual deductible of $10,200. Taxpayers that are eligible deduct contributions to the Health Savings Account on the front page of their return, similar to IRA deductions. It is not an itemized deduction.
EDUCATORS’ DEDUCTION – Massachusetts adopts the deduction for expenses paid or incurred by an eligible educator for books, supplies, equipment (including computers and software) and other qualified materials used in the classroom. The deduction is limited to $250 per educator.
TUITION AND FEES DEDUCTION – Massachusetts adopts the deduction for qualified higher education expenses. Taxpayers with adjusted gross incomes that do not exceed $65,000 ($130,000 in the case of married taxpayers filing joint returns) are allowed a maximum deduction of $4,000 and taxpayers with adjusted gross incomes that do not exceed $80,000 ($160,000 in the case of married taxpayers filing joint returns) are allowed a maximum deduction of $2,000. This deduction is available only for tax year 2005.
If you take the Hope or Lifetime Learning Credit on your federal income tax return, you may not take the Massachusetts deduction. You should compare the difference between taking the federal credit and taking the deduction on both the federal and Massachusetts income tax returns.
DEDUCTION FOR CLEAN FUEL VEHICLES – For those of you that have purchased hybrid vehicles, the deduction that had been allowable through tax year 2004 is now extended to December 31, 2006. The only part of the cost of the vehicle that is deductible is the incremental cost permitting the use of clean burning fuel. In the case of hybrid vehicles that can be propelled by both gasoline and electricity, you can use the manufacturer’s certification of incremental cost for use of clean fuel. The most that can be deducted in 2005 for hybrid vehicles is $2,000.
STUDENT LOAN INTEREST – A federal and Massachusetts deduction is allowed for interest paid by the taxpayer, up to an annual maximum of $2,500. The old rule that only allowed interest to be deducted for the first 60 months of the loan no longer applies because of the Code Update.
MASSACHUSETTS TAX EXEMPTIONS INCREASE – Massachusetts has increased personal exemptions as follows:
· Single/Married filing separate increases by $275. The new exemption amount is $3,850
· Head of Household increases by $425. The new exemption amount is $5,950
· Married filing a joint return increases by $550. The new exemption amount is $7,700.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org