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State tax filing
I had to look up several different sources in order to ensure my answer to you, as I didn't find a direct quote on the website I referred to in my earlier answer that specifically stated how to report and exempt the income. The first document, from the Massachusetts Department of Revenue that answers your question more clearly, is this one: Massachusetts - Taxes For Expats (click on link, and .PDF document will download.) If you scroll down to FAQ #8, you'll read the following:
8. Am I subject to tax in Massachusetts on income that is covered by a tax treaty?
If the United States has a tax treaty with another country, Massachusetts will recognize the treaty and will exclude the income to the extent it is excluded federally...
However, the income received must be included in your Massachusetts gross income and reported as "wages" (quotes part of the article), and if the amount is deductible from Massachusetts gross income, it is claimed as a Schedule Y dedcution, you may still need to file a return if your income exceeds the threshold requirement for filing a tax return...
While that same article also mentions Form 1 NR/PY, this other article Income Tax Filing for Foreign Residents and Nonresidents FA states the following on page 7:
Do my tax treaty benefits apply to my state taxes?
Whether or not a state chooses to honor federal income tax treaty agreements will vary on a state-by-state basis. In Massachusetts, to the extent that income is excluded federally per a tax treaty, that income will also be exempt from state income tax. The income must still be reported on the return as wages and then claimed as a deduction on Schedule Y, Line 4.
You will note that the article makes no specific reference to Form NR/PY, and that is because the same treatment can be made on Form 1 (MA resident return). Open up the following PDF file of Schedule Y: form 1 - Mass.gov (The link is only Schedule Y). You will note that the aforementioned Line 4 states that you either exempt the income included in Form 1, Line 3 or Form 1-NR/PY, line 5.
Although you are a Nonresident Alien, you will meet the statutory definition of a Massachusetts resident for tax purpose if you maintained a domicile (such as an apartment or a home) and were physically present in Massachusetts for at least 183 days. That seems to be the case in your situation. Regardless, if your interest income is exempt for Federal taxation because of a tax treaty, it is likewise excluded from Massachusetts. But you will report it by including the interest income as "wages" on Line 3 of Massachusetts Form 1 (even though interest income is not technically wage income, that is the instruction for Form 1), and then exempt the income on Line 4 of Schedule Y.
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