One thing the finance people never seem to mention to me when trying to talk me into planning my retirement is how doing my taxes will change once I do retire. Unlike most W-2 income, it’s handled differently depending on where it comes from, where you live and what codes the bank puts on the 1099-R. (And if they put the right code!)
The state of Massachusetts is no different. In this case, some pensions are exempt and need special handling. I’ve noticed a bit of confusion on this and thought I’d give you some more help. Thanks to our Massachusetts guy for helping me keep my facts and steps straight.
What pensions are exempt?
- Pension income received from a contributory annuity, pension, endowment or retirement fund of the U.S. Government or the Commonwealth of Massachusettsand its political subdivisions.
- Pensions from other states or its political subdivisions which do not tax such income from Massachusettsor its political subdivisions may be eligible to be deducted from Massachusetts taxable income. This pension income, however, should be reported in line 4. Refer to Schedule Y, line 13 instructions to determine eligibility for this deduction.
- Noncontributory pension income or survivorship benefits received from the U.S. uniformed services (Army, Navy, Marine Corps, Air Force, Coast Guard, commissioned corps of the Public Health Service and National Oceanic and Atmospheric Administration) is exempt from taxation in Massachusetts.
Massachusetts state court judges who were appointed on or after January 2, 1975 are participants in the Massachusetts contributory retirement system and their pensions are nontaxable. State court judges who were appointed prior to January 2, 1975 receive taxable noncontributory pensions. If you retired under Chapter 32, Sections 56–60 of Massachusetts General Laws and are a veteran who began Massachusetts state service prior to July 1, 1939, all or part of your pension income may be subject to tax. If you elected to receive your proceeds from contributions in one lump-sum distribution, your original contributions to the retirement system are not taxable. Noncontributory pension income received after a lump-sum distribution is fully taxable and should be reported in line 4.
If you’re still not sure your pension is exempt, you can contact the Massachusetts Department of Revenue for help. You can find their contact information on our Massachusetts Information Page.
Once you have determined that your return is indeed exempt, you can follow these steps to make sure it is entered correctly in TurboTax:
- Select the "Federal Taxes" tab
- Select the "Income" tab
- Select "5. IRA and Pension Distributions" Add or Edit button
- Enter the pension information (payer’s name, gross distribution, etc.)
- Continue through the interview until you get to the screen titled "Select Your State" and select Massachusetts
- Continue to the next screen and indicate whether the pension is:
- Federal government pension that I contributed to
- Military and survivors’ pension
- MA state or local govt pension that I contributed to
- Certain state court judges’ pension
- Select the "State Taxes" tab and complete the Massachusetts interview
- If one of the 4 options were selected in step 6 above, the pension is excluded from Form 1, line 4 and an explanation statement is attached to your Massachusetts return with the reason for excluding the pension
I hope this helps clear things up for you.