A change in the federal income tax that was designed to allow more persons to receive tax benefits from child care service payments has boomeranged in Maryland.
Unless legislation is passed changing the situation, state officials say that no persons filing Maryland state tax forms will be able to use the cost of child care services as a tax benefit on this year's state taxes. That includes an estimated 50,000 people who were able to save a total of $3 million in state taxes last year by using the cost of child care services as a deduction, officials say.
The reason is that under federal legislation passed last October, child care costs are a federal tax credit instead of a tax deduction, as they were listed last year, the first year they were allowed as a tax benefit.
"The Maryland law is in conformity to the federal base," explained James Swisher, assistant chief of income division for the state of Maryland. "Whatever deductions permitte on the federal return, you just pick them up off the federal return and put them on Maryland law.
"Along came the 1976 Tax Reform Act and they took away the deduction and made it a credit," he continued. "We have never permitted federal credits of any kind. So you don't have any (state) credit and you don't have any (state) deduction (for child care service payments)."
Dominic Laponzina, a spokesman for the federal Internal Revenue Service, said the change was made so that more people could take advantage of the tax benefit. Last year, only persons who filed itemized returns could use child care costs as a tax benefit, he said. But this year, because the costs are treated as a tax credit, the benefit is available to persons who take the standard deduction, he said.
A deduction means the costs are subtracted from the total income, then the tax is figured based on the adjusted income. A tax credit means the costs are subtracted from the amount of taxes that would be paid.
Under last year's federal law, persons were allowed to deduct from their federal taxable income a maximum of $4,800 a year in eligible child care costs. The deduction was reduced by 50 cents for every dollar more than $35,000 the person listed as income.
This year, the income limitation has been lifted and persons are allowed to deduct 20 per cent of eligible childcare costs (to a maximum of $400 a year for one dependant child and $800 a year for two or more dependant children) from the amount of federal taxes they have to pay.
State Rep. Benjamin Cardin (D-Baltimore), chairman of the Maryland House Ways and Means Committee, said the Joint Tax Review Committee is scheduled to take up the issue this week.
"We certainly will provide benefits for all people probably who were exempted last year," he said. However he admitted it could create problems for this year's state tax returns. "I don't know how we could do it," he said. "We could do it. But it would present problems."
However, he took issue with the federal practice of eliminating the income limitation saying the federal government has "expanded the base of those who can claim it to an astronomical figure."
Meanwhile, a lot of people across Maryland are having the reaction John Bell, an accountant for the city of Rockville, had when he was calculating his state income tax. Bell, who said he paid out almost $3,000 in child care service costs for his two young sons, said that because of the change, he will have to pay several hundred dollars more in state income taxes this year than he had counted on.
"A lot of people plan on getting that $300-$400," he said. "When the bombshell hits, it's going to mushroom over the entire state of Maryland. I'm sure its going to hit a lot of people like a ton of bricks."