Massachusetts puts capital gain distributions reported without a federal Schedule D in Part B instead of Schedule D (Part C) #9957

What's wrong

non_sch_d_capital_gains (capital gain distributions reported on Form 1040 line 7 without a federal Schedule D) is in irs_gross_income, so it enters ma_gross_income. But neither ma_part_a_gross_income nor ma_part_c_gross_income includes it, so it stays in Part B. Massachusetts reports these distributions on Schedule D, line 6 (Part C).

With 5.0% rates on both Parts from 2020, the tax is the same when there are only distributions. It differs when the filer also has capital losses: the losses cannot reach the distributions, and a long-term loss is applied against short-term gains that the distributions already cover.

Examples (2023, single, wages 60,000)

Computed from the 2023 Form 1, Schedule B and Schedule D (Form 1, line 19 = 60,000 − 2,000 − 4,400 = 53,600 in every row):

• Row 2: Schedule B, line 19c = −2,000; line 20 = 0 (line 9 is 0); line 21 = −2,000; line 22 = Schedule D, line 14 = min(2,000, 5,000) = 2,000. Schedule D, line 15 = 5,000 − 2,000 = 3,000. Tax = 5% × 53,600 + 5% × 3,000.
• Row 3: Schedule D, line 1 = −3,000; line 6 = 5,000; line 9 = 2,000 = line 13 = line 21. Tax = 5% × 53,600 + 5% × 2,000.
• Row 4: Schedule D, line 13 = −1,000 + 5,000 = 4,000, so Schedule B, line 25 is omitted and line 39 = 3,000. Tax = 5% × 53,600 + 8.5% × 3,000 + 5% × 4,000.

The last row also shows #9953, which #9954 fixes.

Evidence

2023 Schedule D, page 1:

"6 Enter amount from U.S. Schedule D, line 13, col. h. If U.S. Schedule D not filed, enter the amount from U.S. Form 1040, line 7."

2023 Form 1 instructions, page 26, Schedule D:

"You must complete Massachusetts Schedule D if you had long-term gains or losses from the sale or exchange of capital assets or from similar transactions which are granted capital gain or loss treatment on your U.S. return, or if you had capital gain distributions. If you did not file U.S. Schedule D but are reporting capital gain distributions on U.S. Form 1040, line 7, you must complete Massachusetts Schedule D (see line 6 instructions)."

Same instructions, page 27:

"Line 6. Capital Gain Distributions. If you did not file U.S. Schedule D, enter the capital gain distributions reported to you by a mutual fund or real estate investment trust from U.S. Form 1040, line 7."

M.G.L. c. 62 § 2(b)(3):

"Part C gross income shall be capital gain income which equals the gains from the sale or exchange of capital assets held for more than 1 year."

26 U.S.C. § 852(b)(3)(B):

"A capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 1 year."

The non_sch_d_capital_gains documentation: "Capital gain distributions (Form 1099-DIV box 2a) reported on Form 1040 line 7a without Schedule D." Distributions reported on a federal Schedule D (schedule_d_capital_gain_distributions) are already part of long_term_capital_gains.

Fix

Add non_sch_d_capital_gains to the long-term amount in ma_part_c_gross_income and ma_part_a_agi (Schedule D, line 13), and leave it out of ma_part_b_gross_income. #9906 adds ma_part_c_agi and ma_long_term_loss_against_dividends formulas that read long_term_capital_gains; they need the same change.