After studying the impact of the federal Tax Reform Act of 1986, Maryland made a number of significant changes in state income tax rules. These included increases in the personal and dependent exemption and in the standard deduction, the addition of a new filing status and retention of the tax break on capital gains, substantially eliminated for 1987 for federal purposes.
As a result of the changes, the minimum income levels for filing a Maryland return have been increased. Significant changes to prior year rules will be pointed out in the text.
You may file your return on short Form 503 if you meet all the tests spelled out on the back of that form. If you answer "yes" to any of the 15 questions appearing there, you must use the longer Form 502. The following explanations apply specifically to Form 502, but can be easily extrapolated for taxpayers filing the short form.
There are now seven filing categories for Maryland taxpayers. Five of these are defined as they are for federal purposes: single, married filing jointly, married filing separately, qualifying widow(er) with a dependent child and -- new this year -- head of a household.
The sixth category is unchanged from prior years; you may file combined separate returns (on the same form) if you file a joint federal return but wish to file separate Maryland returns. You should use this filing status only if you and your spouse each had independent income in 1987. If so, calculate the tax both ways -- joint and combined separate -- to see which method yields the lower total tax.
If you decide to file combined separate returns, use a single Form 502 and enter the husband's data in column A, the wife's in column B; on page 2, the total of columns A and B goes in the column headed "All Taxpayers." All other filers should use only Column B on page 1 and the "All Taxpayers" column on page 2.
The final category has been added for anyone who can be claimed as a dependent on another taxpayer's return. If you are in this group, you must use Form 502, and you may not claim a personal exemption for yourself.
You are entitled to one exemption for each personal and dependent exemption claimed on the return. Like the federal rule, no extra exemption is allowed for age or blindness, compensated for by a special addition to the standard deduction. But you continue to get an extra exemption for each dependent who is 65 or older.
Each exemption claimed on a full-year return is worth $1,000 -- up from last year's $800 figure. The pro rata share on a part-time return is similarly higher, up to $83.33 per exemption for each month covered by the return.
The first step in determining the amount of income subject to Maryland tax is to transfer the numbers for the various income categories from the federal return to the corresponding lines in the "All Taxpayers" column, in the section headed "Income and Adjustments from Federal Return" on page 2.
If you are filing combined separate returns, allocate the appropriate part of each item of income to the husband (in column A) or the wife (in column B). Half of the income from any asset registered in joint names is considered to belong to each spouse.
Do not make any changes to the federal figure in this section of page 2. Any necessary adjustments will be added to or subtracted from the federal total in the following sections.
In this same section, on line 16, claim a lump-sum amount for the total of all adjustments to income taken on your federal return, including alimony payments and IRA or Keogh contributions. If you're filing combined separate returns, allocate the proper share to each spouse.
Several modifications of federal income are required to arrive at Maryland income. You must add any interest received in 1987 on "foreign" state and local obligations not taxable on your federal return. However, Maryland bonds are exempt, and Washington Metro and Washington Suburban Sanitary Commission bonds are not subject to Maryland tax. In addition, interest on obligations of Puerto Rico and the Virgin Islands are exempt from local tax in all states.
If you used federal Form 4972 for five- or 10-year averaging of a lump-sum distribution, for Maryland you must add a part of that distribution back. Use the work sheet on page 4 or the instruction booklet for your calculations.
Missing this year: the addback of the two-earner credit and the $100/$200 dividend exclusion, both of which were eliminated by the Tax Reform Act of 1986 and do not appear on the federal return.
In this section you have your opportunity to deduct any state tax refund reported as income on your federal return; federally taxable Social Security or Railroad Retirement benefits entered on line 13 of the "Income section;" and taxable interest received in 1987 on U.S. government or government agency obligations. (But interest on GNMA and FNMA securities and income received from a mutual fund that invests in U.S. obligations are taxable on your Maryland return and may not be subtracted.)
The Maryland tax benefit for child and dependent care is taken as a subtraction from income rather than as a tax credit. Get the information from federal Form 2441 or from Part I of Schedule 1 of Form 1040A -- but be sure to carry over to line 24 of the Maryland return the amount of qualifying expenses, not the smaller amount of the federal credit. Attach a copy of Form 2441 or Schedule A to your Maryland return.
You may deduct unreimbursed travel expenses for the use of your car at the rate of 22.5 cents a mile (up from 21 cents in 1986) when providing volunteer services for certain charitable purposes (specified on page 5 of the instruction booklet). To claim this subtraction, you must attach Form 502V; this form isn't included in the booklet, but may be obtained by mail or in person at any Maryland tax office.
A legally blind individual may subtract up to $5,000 of the cost of a reader; the employer of a blind person may claim up to $1,000 for an on-the-job reader for that employee.
If you were 65 or older or totally disabled on Dec. 31, 1987, you may exclude federally taxable pension income, up to a ceiling of $9,100 minus Social Security or Railroad Retirement benefits received. (This is an increase from last year's $8,600 ceiling.) Compute the exclusion -- separately for husband and wife if both qualify -- in the "Pension Exclusion" section at the bottom of page 2 of Form 502.
If you're a former police or fire officer, subtract pension payments received for injury or disability incurred on that job, but only to the extent the payments are included in income. If you're still actively employed as a member of any state, county or local police or fire department, you may subtract any amount included as income for personal use of an official vehicle. (This amount should have been separately stated on your Form W-2.)
You may subtract up to $1,000 of expenses incurred for the adoption of a child with special needs through a public or nonprofit adoption agency.
Maryland has retained the 40 percent credit on long-term capital gains that was eliminated for federal purposes by the new tax law. Use Maryland Form 502CG to calculate the exclusion. In lieu of listing all your individual transactions on the Maryland form, you may attach a copy of federal Schedule D and simply carry the required totals from Schedule D to Form 502CG.
There is no Maryland tax imposed on gains from the sale of bonds issued by the state or local Maryland governments, to the extent such gains were included in your total income. But do not remove any such transactions when completing Form 502CG; instead, claim the allowable amount as an included item in "Other" subtractions on line 31 of Form 502.
New this year: You may itemize deductions for Maryland only if you itemized on your federal return. Maryland Form 502A has been eliminated; attach a copy of federal Schedule A to your return, and find your Maryland itemized deductions by completing lines 33 through 37 of Form 502.
If you do not itemize, you may claim the standard deduction. The basic deduction is 15 percent of Maryland adjusted gross income, with a minimum of $2,000 and a maximum of $4,000 on a joint return or the return of the head of a household or a qualifying widow(er) -- filing categories 2, 5 and 6. All other filers (categories 1, 3, 4 and 7) have a minimum standard deduction of $1,000 with a ceiling of $2,000.
However, taxpayers who are 65 or older or blind are given an extra $800 standard deduction -- a technique patterned after the new federal system. If you file a joint return, each spouse may qualify individually for these extra exemptions, up to a total of four on a joint return where both spouses are 65 or older and blind. Use the work sheet on page 6 of the instruction booklet to calculate your standard deduction.
On a combined separate filing, itemized or standard deductions are calculated separately for each spouse, and both must use the same method. If you are unable to determine the division of itemized deductions between spouses, the total must be divided based on the ratio of each spouse's income to total income.
You may find your tax on the tax tables starting on page 11 of the instruction booklet, unless you fit any of the disqualifying circumstances defined on page 6. Check the box labeled "Tax Table Method" on line 56, then find the tax on your Maryland income on line 55. Be sure to use the correct table for your filing status, and the right column for the number of exemptions you claim.
If you itemize deductions or wish to calculate the tax yourself using the standard deduction, check the correct box on line 56 and enter either total Maryland itemized deductions from line 37 on page 2, or your standard deduction from the work sheet on page 6 of the instruction booklet.
Then subtract the value of your exemptions (at $1,000 each), and go to the work sheetss on page 10 of the booklet to determine your Maryland income tax. For most taxpayers, the "Standard Deduction Method" and the "Tax Table Method" will yield about the same tax; you may want to work it out both ways, then select the method that comes up with the lesser tax (if there is a difference).
But if you or your spouse is 65 or older or blind, you will come out ahead using the standard deduction; the tax tables do not include any allowance for the extra $800 deduction for either of these circumstances.
After finding your Maryland state tax liability from either the tax tables or the work sheetss, you must add the local "piggyback" assessment to determine the total tax due. The local rate is 50 percent for every county and Baltimore City (except Calvert and Worcester counties, which have a 20 percent rate, and Charles, Queen Anne's and Talbot counties, which have 45 percent).
After entering your total Maryland tax, you're ready to claim your credits. The principal credit for most people is the Maryland tax withheld from your pay, followed by total estimated tax payments made during the year. If you paid income tax to another state on Maryland income, you may be eligible to claim a credit against your Maryland tax; see Form 502CR for instructions. If you conduct a trade or business in Maryland, you may qualify for an enterprise zone tax credit, claimed on Form 5027.
If you qualify, do not attach this form to your income tax return, and do not forward it in the same envelope with the tax return. Two envelopes are inserted in the instruction booklet. The yellow one, addressed to the Comptroller of the Treasury, is for mailing your income tax return; the blue envelope, to the Maryland Homeowners' Tax Credit Program, should be used for mailing Form HTC-60.