Maine’s Medical Expense Deduction and Pine Tree Development Zone Credits Are Restored

Stan Rose, Managing Director, Tax Practice
May 5, 2014

A catchy subtitle for the tax laws described in this update might be: “First you see them, then you don’t, and then you see them again.”

Maine’s 126th legislature adjourned for the summer with a flurry of activity impacting Maine taxpayers. In a May 2 Tax Advisory, we informed our readers that with L.D. 1664, Maine is phasing in a reversal of its stingy charitable contribution limitations. Right on its heels, and surviving a veto by the Governor, is L.D. 1858. It restores two significant tax benefits, as follows:

Medical Expenses are Exempted from Itemized Deduction Cap of $27,500

Background

Beginning with 2013 tax returns, Maine individual tax return filers became subject to an overall cap of $27,500 on itemized deductions. Many parties suggested that exceptions should be made for charitable contributions, because the restriction could unfavorably impact donations. As noted above, this exception was created, although its impact will be delayed. (See our May 2 Advisory for more details). Others noted that by including medical expenses in the cap, the law unfairly targets those who are elderly or of limited income. This is a logical argument, for two reasons: First, the elderly generally incur more medical expenses. Second, for federal purposes (which Maine uses as its starting point) medical expenses are not deductible at all unless they exceed 7.5% of income for taxpayers age 65 and older and 10% for all others. Because this floor is based on the taxpayer’s income, the likelihood of claiming the credit increases when income decreases, or when medical costs climb unusually high relative to income (such as end of life care).

Current Law Change

Quite simply, L.D. 1858 states that beginning with tax year 2014, the $27,500 cap on itemized deductions does not apply to medical expenses.

Pine Tree Zone Credits are Reinstated

Background

Maine offers several tax incentives under the umbrella of the Pine Tree Development Zone (“PTDZ”) program. There are many components of this credit, which are summarized in an article penned by BNN’s Merrill Barter that originally was published in Mainebiz.

Several weeks ago, L.D. 1843 was passed, which retroactively cut many of the PTDZ benefits in half effective January 1, 2014, by reducing certain tax credits under the PTDZ umbrella from 50% to 25%, and others from 100% to 50%. This created an immediate uproar in the business community because local companies had to qualify in advance for these credits by agreeing to take certain actions (such as hiring new employees and increasing payroll). In exchange for their actions, the PTDZ benefits would be available to them for a period of 10 years. L.D. 1843 was an unexpected change that many viewed as pulling the rug out from under companies once it was too late. The governor refused to sign the bill (although it passed without his signature) and efforts began immediately to reverse the portion of the bill related to the PTDZ incentives. Those efforts were successful late last week with L.D. 1858.

Current Law Change

L.D. 1858 reversed the impact of L.D. 1843 before it had a chance to do any damage. It reinstated the full credit percentages that participants were promised when they qualified for the credit.

It is hard to view these changes in any other manner than the legislature recognizing that its own previous actions had unintended or inappropriate consequences, and with L.D. 1858, they righted the ship. Individuals with relatively high medical expenses will not receive insult to injury by being denied deductions in Maine that are allowed on their federal tax returns, and Maine businesses of all sizes who relied on promises made by the state regarding PTDZ tax breaks can continue to count on those benefits.

If you have any questions, please contact Stan Rose or your BNN tax advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.