What Income Is Not Taxable in Massachusetts?
Massachusetts imposes a flat 5% income tax on most earnings, but certain types of income are exempt from state taxation. Understanding these exemptions can help residents maximize their tax savings and better plan for retirement.
Types of Income Exempt from Massachusetts State Tax
Several forms of income are not subject to Massachusetts state income tax, including:
1. Social Security Benefits
Massachusetts does not tax Social Security retirement, survivor, or disability benefits, regardless of income level. However, federal taxes may still apply based on total earnings.
2. Public Pensions
Retirement benefits from federal, state, and local government pensions—including those for Massachusetts teachers, police officers, and firefighters—are fully exempt from state taxation. This provides financial relief for retirees who have served in public roles.
3. Veterans’ Benefits
Veterans and their families receive tax-exempt benefits, including:
VA disability compensation
Military pensions
Survivor benefits
Certain education assistance programs
4. Some Private Pensions and Retirement Income
While Massachusetts generally taxes private pensions, some out-of-state government pensions may qualify for exemptions, depending on reciprocity agreements with other states. If a pension is taxable in its home state, Massachusetts may tax it as well.
5. Life Insurance Proceeds
Proceeds from a life insurance policy received due to the death of the insured are not taxable at the state level. This ensures that beneficiaries receive the full amount without state tax deductions.
6. Workers' Compensation Benefits
Payments received under Massachusetts' workers' compensation laws for job-related injuries or illnesses are exempt from state income tax. This exemption helps injured workers manage medical and living expenses while unable to work.
Other Considerations
While Massachusetts provides exemptions for certain income sources, other forms of retirement and investment income, such as 401(k) withdrawals, traditional IRA distributions, and capital gains, are taxable at 5%. Planning for these taxes can help residents manage their retirement income effectively.
Conclusion
Massachusetts exempts Social Security, public pensions, veterans' benefits, and some private pensions from state income tax. Understanding these exemptions can help retirees, veterans, and beneficiaries plan their finances more effectively and reduce their overall tax burden.
