A New and Improved Maine Educational Opportunity Tax Credit
Since its creation in 2008, the Maine Educational Opportunity Tax Credit has provided a tax benefit to qualifying Maine residents. As described in a previous article, the intention of the credit is to encourage Mainers to earn a post-secondary education and begin a career working in Maine. The credit has been expanded, effective for 2016 tax returns, to make it even more beneficial. Unfortunately, many people remain unaware of this credit. The purpose of this article is to describe the basics of this credit and explain the recent, favorable changes.
As seen below, a significant change that is effective for those obtaining a degree after 2015 is that the credit is no longer limited to those who earned a degree from an educational facility located in Maine. Any accredited school in the United States qualifies. The credit also now applies to graduate degrees, while in prior years it was limited to bachelor’s degrees and associate’s degrees.
General qualifications and mechanics
Eligible education loan payments include only those that were made during the tax year in which the qualifying graduate was a Maine resident and employed in the state. In addition, payments eligible for the credit are limited to the amount of the required loan payment and can be even further limited by the state-prescribed benchmark loan amount. For the 2016 tax year, the monthly benchmark loan payment is $70 for an associate’s degree, $373 for a bachelor’s degree, and $325 for a graduate degree.
The credit generally is non-refundable. This means that it cannot exceed the amount of your Maine income tax, but it can offset it completely, reducing it to zero. However, to incentivize certain studies, degrees in science, technology, engineering, or mathematics (“STEM”) qualify as refundable credits. This means that if the amount of the credit exceeds Maine tax, the credit will not only reduce that tax to zero, but the excess will be paid to the qualifying student as a cash refund. Non-refundable credits are available to students or employers, while refundable credits are available only to students.
Any credit that remains unused may be carried forward for up to 10 years for use on subsequent years’ tax returns.
Graduates who qualify
The tax credit is available to qualifying graduates and employers who have made eligible education loan payments. An individual is considered to be a qualifying graduate for 2016 if he or she meets the following criteria:
- Obtained an associate or bachelor’s degree after 2007 from an accredited Maine community college, college or university; or
- Obtained an associate or bachelor’s degree after 2015 from a non-Maine accredited community college, college or university; or
- Obtained a graduate degree after 2015 from an accredited Maine college or university; and
- After graduation, is a Maine resident and during the tax year worked at least part-time in Maine, was deployed for military service in the United States Armed Forces, including the National Guard and the Reserves of the United States Armed Forces, or was employed at least part-time on a vessel at sea.
Employers who qualify
The educational opportunity tax credit is also available to employers who have made eligible educational loan payments for their qualifying employees. An employee who is eligible for the credit is a graduate who:
- Obtained an associate or bachelor’s degree after 2007 or a graduate degree after 2015 from an accredited Maine or non-Maine community college, college or university, and
- After graduation, is a Maine resident working in Maine (as defined by Maine statutes in 36 M.R.S. Section 5217-D(1)(H)).
In cases where an employer pays for a portion of student loan payments and the employee pays the remainder, both parties are eligible for the credit. The credit is limited to the amount paid by either party, or if the amount paid by the employer and employee combined is greater than the required loan payment (or benchmark loan payment if relevant), the credit claimed by either party is prorated based on the eligible payments made by that party relative to total eligible payments made by both the employer and employee.
To illustrate employer and employee claiming the credit, consider Allison, who works for ABC Company; part of Allison’s compensation includes ABC Company repaying a portion of her student loans with Allison paying for the remainder and any additional amount out of pocket. Allison’s monthly payment amount eligible for the credit is $350 per month, $200 of which ABC Company agrees to pay for monthly. Allison decides to match her employer’s payments and also pays $200 per month. Since the combined monthly payments are in excess of the eligible payment amount, proration applies; since both employer and employee contributed $200 out of the $400 in monthly payments, each is eligible to receive a credit amount equal to 50% of the total eligible payment amount per month. Allison and ABC Company would each be eligible for a credit of $175 for each month payments were made.
Whether you are a Maine graduate working in Maine or run a Maine business wanting to attract some talent fresh out of college, the Maine Educational Opportunity Tax Credit provides a powerful incentive for the party funding student loan payments. If you think you may be able to benefit from the credit or have any questions about it, please contact your BNN tax advisor today at 1.800.244.7444.
- Previous BNN article – Maine Educational Opportunity Tax Credit
- 2016 credit worksheet for employers
- 2016 credit worksheet for graduates
- Maine law defining aspects of the credit
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.