The Massachusetts Part A income tax covers interest, dividends, and certain capital gains, and it applies three different rates depending on what kind of income you have: 5% on interest and dividends, 8.5% on short-term capital gains, and 12% on long-term gains from collectibles (effectively about 6% after a 50% deduction). High earners may owe an additional 4% surtax on income above an annually adjusted threshold. Getting the classification right matters, because the same dollar can be taxed very differently depending on which bucket it lands in.1M.G.L. c. 62, § 2(b)(1)
What Counts as Part A Income
Massachusetts sorts income into three parts. Part A is defined under M.G.L. c. 62, § 2(b)(1) as all interest, dividends, and capital gain income in your Massachusetts gross income, minus three specific exclusions that get reclassified elsewhere.1M.G.L. c. 62, § 2(b)(1)
Income that stays in Part A:
- Short-term capital gains on assets held one year or less. A stock bought in March and sold in November at a profit produces a Part A gain.
- Long-term gains on collectibles such as art, antiques, coins, or precious metals held longer than one year. Unlike other long-term gains, collectibles stay in Part A rather than moving to Part C.
- Dividends, which generally land in Part A regardless of how long you have owned the underlying stock.
- Interest from banks outside Massachusetts, from private lending, and from term or time deposits of $100,000 or more at Massachusetts banks.
Three categories get pulled out. Interest and dividends from savings accounts, share accounts, and term deposits under $100,000 at Massachusetts-chartered banks, credit unions, and federally chartered institutions located in Massachusetts are reclassified as Part B income taxed at 5%. Long-term capital gains on non-collectible assets held more than one year drop out of Part A and are taxed under Part C. Interest earned by certain licensed lenders in the course of business is also excluded.
The $100,000 bank-deposit threshold is worth watching. A CD at a Massachusetts bank with a principal below $100,000 produces Part B interest. Cross the line, and the entire interest amount shifts to Part A.
Part A Tax Rates
M.G.L. c. 62, § 4 sets three separate rates for Part A income:2M.G.L. c. 62, § 4
- Short-term capital gains: 8.5% on net gains from assets held one year or less.
- Long-term collectibles gains: a nominal 12%, reduced by a 50% deduction on the gain, which works out to roughly 6% on the full amount.
- Interest and dividends: 5%, the same rate that applies to Part B income.
Confusion about the 8.5% rate is common. Many taxpayers assume short-term gains are taxed at 12%, but the statute reserves the 12% rate for collectibles. For ordinary short-term stock and asset sales, the rate is 8.5%.
The 4% Surtax Above the Million-Dollar Threshold
Since 2023, Massachusetts has imposed an additional 4% surtax on taxable income above an annually adjusted threshold. For tax year 2025 the threshold is $1,083,150. The 2026 figure had not been published at the time of writing but will be adjusted upward for inflation.
The surtax applies to combined taxable income across all three parts. Massachusetts adds Part A, Part B, and Part C taxable income together, treating any part with a negative balance as zero. If the total exceeds the threshold, you owe 4% on the excess. A large short-term capital gain can push you over the line even when your wages alone would not. Someone with $900,000 in Part B wages and a $300,000 short-term stock gain in Part A would owe the surtax on the amount exceeding the threshold.
Deductions, Exemptions, and Loss Netting
Several reductions apply before the Part A rates hit. M.G.L. c. 62, § 3 provides a small exemption for interest and dividend income: $100 for single filers and $200 for joint filers, taken as a direct reduction of taxable Part A interest and dividends.3M.G.L. c. 62, § 3
Excess Part B Exemptions
If your Part B deductions and exemptions exceed your Part B adjusted gross income, the excess spills over to reduce your Part A interest and dividend income. The statute frames this as an additional exemption equal to the amount by which Part B exemptions exceed Part B AGI after Part B deductions. It matters most for taxpayers with low wages but meaningful investment income.
Capital Loss Netting and Carryforward
Massachusetts follows strict ordering rules for capital losses. Short-term losses first offset other Part A income, including short-term gains, collectibles gains, and interest and dividends within the same category. Any remaining short-term losses can then offset long-term capital gains in Part C, starting with gains taxed at the highest rate and working down. Losses left over after that netting carry forward to future tax years.
Short-term losses cannot directly offset Part B income such as wages or salary. The system keeps investment losses within the investment income categories, which prevents a bad trading year from wiping out tax on a paycheck. Unused losses do not expire, but Massachusetts will not track carryforwards for you, so keeping your own records year to year is essential.
Federal Tax Stacked on Top
Massachusetts Part A income also faces federal tax, and the combined burden can be heavy.
Federal Rates on Short-Term Gains
The IRS treats short-term capital gains as ordinary income, taxed at your marginal federal rate. Federal rates for 2026 run from 10% to 37%. A Massachusetts resident in the 24% federal bracket who realizes a short-term capital gain effectively pays 32.5% between the two governments before any surtax.
Net Investment Income Tax
High earners also face the federal 3.8% Net Investment Income Tax on the lesser of their net investment income or the amount by which modified adjusted gross income exceeds the applicable threshold: $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. Short-term capital gains, interest, and dividends all count as net investment income. A married couple filing jointly with $300,000 in total income, including $80,000 of Part A short-term gains, would owe the 3.8% NIIT on $50,000 of that investment income.
SALT Deduction Cap
Massachusetts income taxes are deductible as state and local taxes if you itemize federally, but the SALT deduction is capped. For 2026, the cap is $40,400 for most filers ($20,200 for married filing separately), with a phasedown at higher incomes. Taxpayers with substantial Part A income may find their Massachusetts liability exceeds the cap, so part of the state tax becomes a non-deductible cost.
Reporting Part A Income on Schedule B
Part A income is reported on Schedule B (Interest, Dividends, and Certain Capital Gains and Losses), which attaches to Form 1, the Massachusetts Resident Income Tax Return. Schedule B asks you to list gross interest and dividends, identify each short-term asset sale with purchase and sale dates, and calculate net gains or losses. The totals flow to specific lines on Form 1 where the different rates are applied.
The form reflects the dual-rate structure by separating the 8.5% short-term capital gains from the 5% interest and dividends. Watch which line each figure lands on. Entering a short-term gain on the wrong line can produce the wrong rate.
The Wash Sale Trap
Sell a stock at a loss and buy substantially identical stock within 30 days before or after the sale, and the IRS treats it as a wash sale and disallows the loss. The disallowed amount is added to the cost basis of the replacement shares. The federal rule flows through to your Massachusetts return. Active traders who rely on short-term losses to offset short-term gains in Part A need to be careful here, because a wash sale can quietly eliminate the loss you were counting on to reduce your Part A bill.
Nonresidents and Part A Income
If you live outside Massachusetts, passive investment income is generally not taxable by Massachusetts. That includes interest, dividends, and capital gains from selling stocks or other intangible assets when there is no Massachusetts business connection. Nonresidents who sell Massachusetts real estate or realize capital gains tied to a Massachusetts business do owe Massachusetts tax on those gains.
Late Filing and Underpayment Costs
Massachusetts charges 1% per month, or any fraction of a month, on unpaid tax for returns filed late, up to a maximum of 25%. On a $5,000 Part A liability filed six months late, the penalty alone adds $300 before interest.
Interest on underpaid tax accrues at the federal short-term rate plus four percentage points, compounded as simple interest. The rate changes quarterly and in recent years has run between 8% and 10%. Neither the penalty nor the interest is deductible on your Massachusetts or federal return, so the real cost of filing or paying late runs higher than the posted numbers suggest.