Do Retired People Pay Taxes in Massachusetts?
Many retirees wonder whether they are required to pay taxes in Massachusetts. The answer is yes—retirees must pay taxes on certain types of income, including IRA withdrawals, private pensions, and some capital gains. However, Massachusetts offers tax benefits that can help reduce the overall tax burden for retirees.
Taxation of Retirement Income in Massachusetts
Social Security Benefits
One of the key advantages for retirees in Massachusetts is that Social Security benefits are not taxed at the state level. Regardless of your income, these benefits remain exempt from Massachusetts state income tax.
IRA and 401(k) Withdrawals
Retirees who withdraw funds from traditional IRA and 401(k) accounts will owe state income tax on those distributions. Massachusetts treats these withdrawals as taxable income, similar to how they are taxed federally.
Private and Public Pensions
Private Pensions: Income from private pensions is fully taxable in Massachusetts.
Public Pensions: If you receive a pension from a Massachusetts state or local government agency, your pension income is exempt from state income tax. However, pensions from out-of-state public systems may be taxable.
Capital Gains and Other Investment Income
Short-Term Capital Gains: Gains from the sale of assets held for less than a year are taxed at 12% in Massachusetts.
Long-Term Capital Gains: Gains from assets held for more than a year are taxed at a lower rate of 5%.
Dividends and Interest Income: Massachusetts taxes most dividends and interest at 5%.
Retirement Tax Breaks and Exemptions
While Massachusetts taxes many types of retirement income, there are some relief programs available:
Senior Circuit Breaker Tax Credit: Retirees who own or rent property and have a high property tax burden relative to their income may qualify for a refundable credit of up to $2,590 (for 2023).
No Tax on Social Security: Massachusetts does not tax Social Security income, which can significantly reduce tax obligations for many retirees.
Conclusion
Retirees in Massachusetts must pay taxes on IRA withdrawals, private pensions, and certain capital gains. However, state tax policies, such as the Social Security exemption and the Circuit Breaker Tax Credit, can help lower the tax burden. Understanding these rules can help retirees effectively plan their finances and minimize their state tax liability.
