Massachusetts Paid Family and Medical Leave Taxation Issues

Now that a few months have passed and this new tax has been deducted and/or employer only paid, have we handled it correctly?  What’s to handle, you might ask?

William Delaney, EA
Westwood, MA

I haven’t seen anyone draw down on this fund (with good reason---it’s too soon for benefits to kick-in).  Yes, but is it taxable when it does suddenly appear in a subsequent year – or currently for a RI resident (more on this later).

What about the employee payroll deductions?  If you are like me, at least half of the   W-2 forms which should have shown something in box #14 did not have an entry.  If there is an entry, did you do anything with it?  It qualifies as a SALT (state and local [income] tax) so it should be posted to Schedule A---subject to the $10,000 annual limitation.   For authority, see CCA 200630017 (7/28/2006).

Is it taxable income when received.  YES, according to the Chief Counsel’s Advice cited above.  If you received an itemized deduction for the employee payment, the entire benefit is taxable when received.  If you were unable to itemize, the amount of the payroll deduction becomes your tax basis and it is excluded from taxable benefit income.

While this is the federal rule for the Massachusetts and Rhode Island State plans, other state plans may be treated differently. 

And, if you have not forgotten, the RI “tax” qualifies as a state tax when computing the maximum amount of credit on the MA resident return for taxes paid to another state.  See MA Revised Directive 12-1 (3/15/12).  Does RI reciprocate?  Not at this time.  The regulation in effect since 1/1/1998 is PIT 98-12 and it specifies (see part IV) that the allowable state income tax must be similar to what is allowed on the RI personal income tax return.  The RI personal return only allows (Schedule W) a credit for withholding tax shown on form W-2, box #17).  RI does not follow the MA “rule.”