Governor Deval Patrick's Budget Recommendation - House 1 Fiscal Year 2014

Deferrals of Gross Income

Fiscal Year 2014 Resource Summary (in Millions)
Deferrals of Gross Income 1,131.4 1,374.8 1,524.1

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item description amount
Deferrals of Gross Income 1,524.1
1.101 Net Exemption of Employer Contributions and Earnings of Private Pension Plans 2
Employer contributions to private, qualified employee pension plans are deductible by the employer up to certain amounts and are not included in the income of the employees. Income earned by the invested funds is not currently taxable to the employees. Benefits in excess of any employee contributions previously taxed by Massachusetts are taxable when paid out. The value of the tax deferral on contributions and on the investment income is a tax expenditure.

Origin:  IRC S. 401-415 in effect January 1, 1985 and M.G.L. c. 62 S. 2(a)(2)(F)
Estimate:  $1130
1.102 Treatment of Incentive Stock Options
Massachusetts has adopted the federal rules for employee stock options. Generally, employers may offer employees options to purchase company stock at a later date at a price equal to the fair market value of the stock when the option was granted. At the time employees exercise the option, they do not include in income the difference between the fair market value and the price they pay. If they later sell the stock, they are taxed on the amount by which the price they receive for the stock exceeds the price they paid. Thus, income is deferred and is taxed as a capital gain instead of as compensation.

Origin:  IRC S. 421-425
Estimate:  N.A.
1.103 Exemption of Earnings on Stock Bonus Plans or Profit Sharing Trusts
Investment income earned by stock bonus plans or profit sharing trusts is not taxed currently for employees.

Origin:  M.G.L. c. 62, S. 5(b)
Estimate:  N.A.
1.104 Exemption of Earnings on IRA and Keogh Plans 2
This includes exclusions from income for some retirement contributions; these exclusions and the earnings from them are taxed upon distribution. The deferral of tax on the investment income is a tax expenditure.

Origin:  M.G.L. c. 62, S. 2(a)(2)(F)
Estimate:  $300.3
1.105 Deferral of Capital Gains on Home Sales
Estimate:  N.A.
1.106 Nontaxation of Capital Gains at the Time of Gift
Ordinarily, capital gains are taxed at the time appreciated property is transferred. However, no tax is imposed on a capital gain when appreciated property is transferred by gift. The taxation of appreciation is deferred until the recipient transfers the property. Note: Last year's FY13 estimate reflected the anticipation that capital gains realizations would be higher in tax year 2012 as a result of expiring favorable federal tax rates.
Comment: See also item 1.022 above.

Origin:  IRC S. 1001, 1015
Estimate:  $93.8


IRCFederal Internal Revenue Code (26 U.S.C.)
U.S.C United States Code
M.G.L. Massachusetts General Laws
Rev. Rul.; C.B. Revenue Ruling; Cumulative Bulletin of the U.S. Treasury
ESTIMATES All estimates are in $ millions.


1 1 This item and others citing this endnote cover employee fringe benefits. We accept as standard the following treatment of these benefits: the expense incurred by the employer in providing the benefit is properly deductible as a business expense and the benefit is taxed as compensation to the employee as if the employee had received taxable compensation and then used it to purchase the benefit. Of course, there are problems with this analysis. In some cases, the "benefit" is more a condition of employment than a true benefit. For example, a teacher required to have lunch in the school cafeteria may prefer to eat elsewhere even if the school lunch is free. On the other hand, in many cases the provision of tax-free employee benefits is clearly a substitution for taxable compensation.

2 2 This item and others citing this endnote cover contributory pension plans. The standard tax treatment of these plans is as follows: Component Standard Treatment Contributions: Made out of income that is currently taxed to employees. Investment Income: Taxed to the employee as "earned" income. Distributions from Pension Funds: Tax-free to the extent they are made out of dollars previously taxed to the employees as contributions or investment income. The non-standard treatment of contributions, investment income, or distributions as described in items 1.006, 1.101, 1.104, and 1.402, results in either nontaxation or deferrals of tax.

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