When a Tax Cut is a Tax Increase

When a Tax Cut is a Tax Increase

2019-01-22T21:46:10+00:00January 22, 2019|

I have been writing about the Tax Cut and Jobs Act (TCJA) since it was passed in December 2017.  I am confident that most clients will see a smaller tax burden in 2018 than under the old tax regulations.  However, due to a quirky rule in several states, some taxpayers will see a tax INCREASE on their 2018 state returns.  Unfortunately, Maryland is the most relevant example where taxpayers could see a spike in their liability.

Here’s how it works.  Maryland (and other states) requires that you MUST itemize your deductions on your Federal return in order to itemize on your state return.  If a taxpayer uses the standard deduction federally; they must use it on the MD return.  This wasn’t a huge deal when the Federal itemized deduction threshold was ~$12,000 for a married couple.  Now that the threshold for a married couple is $24,000 AND deductible taxes are capped at $10,000, I expect far more taxpayers to fall under the threshold and be better off using the standard deduction.  Good news for the Federal!  Bad news for the Maryland return as the standard deduction is only $4,500.  So there will be taxpayers that realize a large MD tax increase because of MD’s itemization requirement (I see examples where taxpayers pay $1,000 more in tax due to this requirement).  Here is State Comptroller Franchot addressing it in his annual letter (my highlights):

 

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Unfortunately, there isn’t much we can do about this.  MD is aware of the issue but doesn’t seem in a hurry to address it in any way.  There may be instances where it makes sense for a client to elect to itemize federally even below the threshold simply so to itemize on the MD return.  Of course, those examples will be rather rare and we will advise when it makes sense.  Meantime, I expect some press on this issue in coming months so don’t be surprised if you hear about this “stealth tax increase” in MD.