On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA grants tax cuts to individuals and corporations, increases the threshold for estate tax, caps State and Local Tax (“SALT”) deductions, eliminates personal exemptions, and other provisions targeting allowable deductions.[1] This new tax reform notably provides lower tax rates to individual taxpayers and business owners. However, the new guidelines for claiming credits and deductions has been lowered or eliminated.[2] So, what crucial federal tax changes should Maryland taxpayers be aware of?
First, Maryland taxpayers should know the individual tax cut provisions are only temporary and will expire in 2025.[3] After eight years, the majority of taxpayers will see an increase in their tax rate unless Congress passes new amendments to extend those provisions.[4] Many business owners will receive a tax cut and an increase in allowable deductions, but many of the provisions are also set to expire on or before 2025.[5]
Maryland taxpayers should also know the TCJA will increase the allowable standard deduction that Maryland taxpayers can take by almost double the previous allowance. Also, TCJA will also increase the child tax credit, but a child’s unearned income would be taxed at a higher rate.[6] Moreover, Maryland taxpayers should know the TCJA eliminates personal exemptions and places a cap on SALT deductions.[7] Lastly, the Maryland taxpayers should know the TCJA limits the allowable interest deductions for mortgage loans from $1 million to $750,000.[8]
In response to the TCJA, the Maryland General Assembly enacted new Maryland tax laws to offset a few of the limiting provisions in the federal statute.[9] Maryland taxpayers and tax preparers need to be aware of these changes when filing their 2018 federal and state tax returns. Maryland taxpayers need to decide if they are willing to itemize at the federal level or take the standard deductions.[10] Prioritizing their federal tax returns may result in a higher tax liability at the federal level; but could lead to a lower state liability.[11] Therefore, Maryland taxpayers should consider which return to prioritize to receive maximum benefit. Furthermore, taxpayers are responsible for understanding what deductions are still allowed and which have been eliminated. Since the burden lays on the taxpayers, there may be an initial increase in mistakes when filing both the federal and state returns.
In return, there may also be an increase in tax examinations or more commonly known as audits, creating more tax controversy cases. Tax attorneys should prepare by familiarizing themselves with the common and most frequent deductions and credits that are claimed by individuals. In most cases, if the deductions or credits no longer exist, there may be little to no options in justifying the deductions or credits that the taxpayer claimed. Moreover, there may be an increase in cases involving the most common tax credits, such as child tax credit and/or the earned income credit because the new tax laws have changed the credit limitations.[12]
The TCJA is positively designed to help reduce the income tax rates, give credits to families with children, and incentivize businesses to hire and provide health care to employees.[13] Yet, taxpayers must remember that most of the TCJA provisions are temporary and can lead to higher federal deficit and future hikes in tax rates.[14]Furthermore, the TCJA reduces federal aid in healthcare, education, and infrastructure to the states which can place states in financial burden.[15]Ultimately, a reduction in federal aid to Maryland could result in Maryland taxpayers paying more taxes for those benefits and services. Therefore, taxpayers and tax preparers should accustom themselves in which deductions and credits they are allowed to take and how it can impact their future tax liability and status.
[1]Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054 (2017).
[3]Amir El-Sibaie, A Look Ahead at Expring Tax Provisions, Tax Foundation (January 18, 2018) https://taxfoundation.org/look-ahead-expiring-tax-provisions.
[5]The Joint Comm. on Taxation, List of Expiring Federal Tax Provisions 2016-2027 (Comm. Print 2018).
[6]Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, §11021-11022, 131 Stat. 2054 (2017) (stating that “kiddie tax” will be applied in a harsher manner to income shifting, such as, transfer of investments).
[7]Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, §11041-11042, 131 Stat. 2054 (2017) (SALT deductions are capped at $10,000).
[8]Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, §11043, 131 Stat. 2054 (2017).
[9]S.B. 184, 438thGen. Assem., Reg. Sess. (Md. 2018) (allowing personal exemption for state income tax purposes); S.B. 318, 438thGen. Assem., Reg. Sess. (Md. 2018) (increasing the standard deduction rate to $2,500 for single taxpayers and $5,000 for those filing jointly); S.B. 647, 438thGen. Assem., Reg. Sess. (Md. 2018) (increasing the earned income tax credit).
[10]Comptroller of Maryland, The 60 Day Report: Effects of Federal Tax Law Revisions on the State of Maryland, Maryland Bureau of Revenue Estimates, Maryland Bureau of Revenue Estimates (Jan. 2018) at 17.
[12]Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, 131 Stat. 2054 (2017); S.B. 647, 438thGen. Assem., Reg. Sess. (Md. 2018).
[13]Dylan Grundman, What the Tax Cuts and Jobs Act Means for States: A Guide to Impacts and Options, Institute on Taxation and Economic Policy, January 2018; The Small Business Health Care Tax Credit, Healthcare.gov (accessed on Sept. 10, 2018), https://www.healthcare.gov/small-businesses/provide-shop-coverage/small-business-tax-credits/.
[15]Dylan Grundman, What the Tax Cuts and Jobs Act Means for States: A Guide to Impacts and Options, Institute on Taxation and Economic Policy, January 2018.
ublawforum.com 
Leave a comment