Massachusetts charges a flat 5% income tax on most wages and investment income

Massachusetts has one of the simplest state income tax systems in the country. The state taxes most income — wages, interest, dividends, and capital gains — at a single rate of 5%. There is no graduated scale where higher earners pay a higher percentage. Everyone pays the same 5%, whether you earn $30,000 or $300,000 a year.

The 5% rate has been in place since 2002. It applies to income you earn in Massachusetts or income Massachusetts residents earn anywhere else. If you work in another state but live in Massachusetts, you typically owe Massachusetts tax on that income. If you live in another state but work in Massachusetts, you may owe tax to both states, though you can usually claim a credit for taxes paid to Massachusetts on your Massachusetts return.

Massachusetts also taxes certain types of income at different rates. Long-term capital gains — profits from selling stocks or property you held for more than a year — are taxed at 5%. Short-term capital gains and most other income follow the same 5% rule. The one major exception is income from certain retirement accounts, which may be taxed differently or not at all.

Key Takeaways

  • Massachusetts taxes wages, investment income, and most other income at a flat 5% rate with no higher bracket for top earners.
  • You owe Massachusetts tax on income you earn in the state, even if you live elsewhere, and on income you earn anywhere if you live in Massachusetts.
  • Certain retirement income, including distributions from IRAs and 401(k)s, may be partially or fully exempt from Massachusetts tax depending on your age and the account type.
  • Massachusetts has no local income tax, so the 5% state rate is your only income tax to the state — federal tax is separate.
  • Your employer withholds Massachusetts tax from your paycheck based on a W-4 form you fill out, similar to federal withholding.

What income is taxed and what is not

The 5% tax applies to wages, salaries, tips, and bonuses. It also applies to interest from savings accounts and bonds, dividends from stocks, rental income, and self-employment income. If you sell a stock or piece of real estate for a profit, that gain is taxed at 5% as well.

Some income is exempt. Social Security benefits are not taxed by Massachusetts. Certain retirement distributions are treated specially: if you are 62 or older, up to $6,000 per year of income from IRAs, 401(k)s, and similar accounts is exempt from Massachusetts tax. This exemption phases out for higher earners. Military pensions and some other government pensions also receive preferential treatment.

Gifts and inheritances are not taxed. Money you borrow — a loan from a bank or a friend — is not income and is not taxed. Reimbursements for business expenses are not taxed if they truly reimburse you rather than pay you extra.

How withholding works and what you owe

If you work as an employee, your employer withholds Massachusetts tax from your paycheck. The amount withheld depends on the information you provide on a Massachusetts W-4 form. You can claim allowances to reduce withholding if you expect to owe little or no tax, or you can ask your employer to withhold extra if you want to may support you do not owe at tax time.

Self-employed people and those with significant income from sources other than wages must pay estimated tax quarterly. You send payments to the Massachusetts Department of Revenue four times a year — usually in April, June, September, and January — based on your expected annual income. If you do not pay enough through withholding and estimated payments, you may owe a penalty when you file your return.

At the end of the year, you file a Massachusetts tax return (Form 1) to report all your income and calculate what you actually owe. If too much was withheld, you receive a refund. If too little was withheld, you pay the difference. The filing important date is normally April 15, the same as the federal important date.

Deductions and credits that lower your tax

Massachusetts allows a standard deduction, which is the amount of income you can earn without owing any tax. For 2024, the standard deduction is $4,400 for single filers and $8,800 for married couples filing jointly. If your income is below these amounts, you owe no Massachusetts tax. You can also itemize deductions instead of taking the standard deduction if your itemized deductions are higher, though this is less common for Massachusetts tax.

Massachusetts offers several tax credits that directly reduce the tax you owe. The Earned Income Tax Credit (EITC) is available to lower-income workers and can result in a refund even if you owe no tax. The Child and Dependent Care Credit helps pay for childcare expenses. The Dependent Exemption Credit provides a credit for each dependent you claim.

Property tax relief programs exist for seniors and disabled people with limited income. If you own your home and meet income limits, you may be able to reduce your property tax bill through the Residential Property Tax Exemption or the Clause 41A program. These are separate from income tax but reduce your overall state tax burden.

How Massachusetts tax differs from federal tax

The federal government and Massachusetts both tax income, but they use different rates and rules. Federal tax uses a graduated system where higher earners pay a higher percentage — 10%, 12%, 22%, and up to 37% depending on income. Massachusetts uses a flat 5% for nearly all income. This means high earners in Massachusetts pay a lower state rate than they would in many other states, but they still pay the full federal rate.

Federal and state tax are calculated separately. You file a federal return (Form 1040) and a Massachusetts return (Form 1) in the same year. Your federal return does not automatically determine your Massachusetts tax, though some numbers carry over. For example, your federal adjusted gross income is often the starting point for Massachusetts tax, but Massachusetts then applies its own rules about what is deductible.

If you paid tax to another state, you may be able to claim a credit on your Massachusetts return to avoid paying tax twice on the same income. This credit is limited to the lesser of the tax you paid to the other state or the Massachusetts tax on that income.

Who must file a Massachusetts tax return

You must file a Massachusetts return if your income exceeds the threshold for your filing status. For 2024, you must file if you are single and earned more than $4,400, or married filing jointly and earned more than $8,800. These thresholds match the standard deduction, so if you earn more than the standard deduction, you must file.

Even if you earned less than the threshold, you should file if you had tax withheld from your paycheck. Filing allows you to claim a refund of any overpaid tax. You should also file if you are due a refundable credit like the EITC, which can result in a refund even if you owe no tax.

Massachusetts residents who work in another state must file a Massachusetts return on their Massachusetts-source income, even if they also file in the other state. Non-residents who work in Massachusetts must file on their Massachusetts-source income. If you moved to or from Massachusetts during the year, you may need to file in both states for the portion of the year you lived in each.

Filing your return and getting help

You can file your Massachusetts return on paper or electronically. The paper form is Form 1, available on the Massachusetts Department of Revenue website. Electronic filing through tax software or a tax preparer is faster and reduces errors. Many free tax preparation programs are available through the IRS Free File program if your income is below a certain threshold.

The Massachusetts Department of Revenue offers a telephone helpline and an online chat service to answer questions about your tax return. You can also visit a local tax information office in person. If you use a tax preparer, make sure they are registered with the state if required.

You have three years from the filing important date to file your return and claim a refund. If you do not file within three years, you lose the right to that refund. However, if you owe tax and do not file, the state can assess you for back taxes plus penalties and interest indefinitely.

Frequently Asked Questions

Do I owe Massachusetts tax if I work in another state?

Only if you live in Massachusetts. Massachusetts taxes residents on all income they earn anywhere. If you live in another state and work in Massachusetts, you owe Massachusetts tax on your Massachusetts wages, but you also owe tax to your home state. You can usually claim a credit on your home state return for taxes paid to Massachusetts.

Is Social Security taxed in Massachusetts?

No. Social Security benefits are not taxed by Massachusetts. However, they may be taxed by the federal government depending on your total income. Massachusetts does not count Social Security as income for purposes of the state tax.

What happens if I do not file a Massachusetts tax return?

If you owe tax and do not file, the state can assess you for back taxes, penalties, and interest. If you are owed a refund and do not file, you lose the refund after three years. If you are unsure whether you must file, contact the Massachusetts Department of Revenue.

Can I deduct property taxes or mortgage interest on my Massachusetts return?

Massachusetts does not allow a deduction for property taxes or mortgage interest on the state return. You can only deduct these on your federal return if you itemize deductions. Massachusetts uses a standard deduction instead.

What is the penalty for paying estimated tax late?

If you underpay your estimated tax, you may owe a penalty based on the amount underpaid and how late it was. The penalty rate changes quarterly and is based on the federal rate plus a state adjustment. You can avoid the penalty if your withholding and estimated payments equal at least 90% of your current year tax or 100% of your prior year tax.