Biggest state tax news of the year was the passage last spring of a tax conformity measure by the District of Columbia government.
Some of you may have noted the news item and an approving editorial in The Washington Post at the time. For most D.C. residents, however, it will be now, at tax time, that you recognize your life has been simplified by this one bold act.
In fact, there is more to the changes than just simplification. For example, the old D.C. rule on pensions--disallowing the federal adjustment for IRA and Keogh contributions--raised a real possibility of double taxation if you moved to another state after retirement. This adjustment is now allowed in all three local jurisdictions.
Both Maryland and Virginia have been practicing tax conformity for years. But there have been changes for 1982 for residents of those states too, though much less significant ones than for D.C. So be sure to study the tax forms and read the accompanying instructions carefully as you work.
Tax conformity simply means that a state bases its own tax regulations on the federal law. That is, a taxpayer starts his state tax return by copying the basic numbers from the federal return, then makes adjustments up or down to arrive at state taxable income.
The interlocking nature of the returns requires that you complete your federal return before starting on the state return. But don't finalize the federal return until you have completed the state form.
Sometimes the additional research you do for the state return will trigger a change on the federal. And in many cases you will be required to include a copy of one of the federal schedules or forms as an attachment to the state return.
The accompanying table provides the basic filing instructions and income minimums for each of the three local jurisdictions.
Note that Maryland filing requirements are the same as federal, but the District and Virginia have lower dollar minimums than Uncle Sam for some filing categories. So if you live in either of those two states you may find you are required to file a state return even though you are exempt from filing a federal return.
As a result of the new D.C. legislation, a resident of any of the three states can start his state return simply by transferring various totals from the federal form. General rules
Before looking at each of the states individually, there are a few rules and tips that apply to all three (in addition to the IRA/Keogh adjustment mentioned earlier).
For instance, none of the three states will compute your tax, as the IRS offers to do under some circumstances. Make the calculations easier by rounding all figures to whole dollars.
On a District or Virginia return, use the peel-off label from the instruction booklet on your return, making any necessary corrections. Use the Maryland label only if all the information is correct.
All three states provide a tax benefit for a married couple (living together) when each spouse has separate income. Whether to file a joint return or combined separate returns depends on the amount of income attributable individually to each spouse.
Because of the availability of the combined separate filing category, the new two-earner married couple deduction on the federal return is not needed. So each of the three states provides for the restoration of that deduction to federal adjusted gross income for state tax purposes.
For 1982, all three states now go along with the exclusion of interest earned on tax-free All-Savers certificates. The District didn't accept the exclusion for 1981 but the new tax conformity rules are not retroactive, so you can't go back and claim any such interest earned and reported in that year.
The local jurisdictions all accept the federal Accelerated Cost Recovery System (ACRS) for depreciation of business assets. However, Virginia requires an adjustment to end up with somewhat different timing than the IRS, so if you're a Virginia resident and have depreciable business property, read the instruction booklet carefully.
If you moved your legal residence into or out of one of the three states during 1982, you must file a part-year return for the period of residence. Although each state has somewhat different rules for a part-year return, in general you prorate exemptions and allocate income and deductions to the period in which they occurred.
There is a minor exception for Virginia, applicable to part-year residents who derived their entire federal adjusted gross income for the full year from Virginia sources. If you fit this description, you may claim the full personal exemption rather than prorating for the period of residence.
The District, Maryland and Virginia all have "pay-as-you-go" tax systems requiring that you file an estimated return and make quarterly payments if you have taxable income in excess of specified limits not subject to state tax withholding. Military personnel
If you are a legal resident of Maryland, Virginia or the District of Columbia, you don't lose that status when living elsewhere because of duty assignment.
You are subject to income tax and required to file a resident return in your state of domicile regardless of where you are stationed.
Conversely, if you are a legal resident of another state, you are not subject to income tax in any of the three local jurisdictions solely because you are assigned to military duty there.
So unless you a legal resident of Maryland or Virginia, you are not required to report or pay tax on military income. But you are liable for reporting, as a nonresident, income earned from other sources within the state (a moonlighting job, for example).
The District laws are more liberal, since D.C. doesn't tax the income of nonresidents regardless of where it was earned. If you are a member of the military living in D.C. but claiming legal residence elsewhere, you need not report or pay tax on any income from any source.
But the husband or wife of a member of the armed forces is considered a resident or nonresident according to the general rules in each state without regard to military status of the spouse.
So if you maintained a "place of abode" in one of the three states during the year and worked locally, you may be subject to state tax even though your spouse is in the armed forces and you both claim legal residence elsewhere.
Now let's get back to all taxpayers and move on to a state-by-state look, with particular attention to those areas where the local rules differ from federal tax regulations.