Tax Changes in Maine’s Biennial Budget – The Good, the Bad and the Ugly
By Merrill Barter, Tax Director
The Maine legislature successfully overrode Governor LePage’s veto to pass a biennial budget, thereby avoiding a state government shut-down. The budget bill contained numerous changes to Maine’s tax laws, some of which will have a significant impact on taxpayers’ returns for 2013 and beyond.
- The bill updated Maine’s conformity with the Internal Revenue Code to reference laws in effect on January 2, 2013 (previously December 31, 2011). This means that Maine’s tax laws now include the “extenders” that were included in the American Taxpayer Relief Act of 2012 signed by President Obama on January 2, 2013, including the increased Section 179 expense limits.
- The Capital Investment Credit, originally set to expire after 2012, was extended through 2013, although at a lower rate. For tax years beginning in 2013, a taxpayer may compute a nonrefundable income tax credit equal to 9% (previously 10%) of the bonus depreciation on assets placed in service in Maine during the tax year. The amount of the bonus depreciation used to compute the credit is an addition modification when computing Maine taxable income (thus avoiding “double dipping”), and any unused credit can be carried forward for up to 20 years.
- A refundable “property tax fairness credit” was created for tax years beginning in 2013 and thereafter. This credit will be available to Maine residents with state AGI of up to $40,000, and may refund up to 40% of the amounts by which the property taxes paid (or rent constituting property taxes paid) exceed 10% of the taxpayer’s Maine AGI. The credit cannot exceed $300 ($400 for taxpayers 70 and older). This credit replaces the state’s Circuit Breaker program. Note that for some taxpayers, this credit may be “bad or ugly” because (1) the maximum benefit from the new credit is lower than the maximum available under the Circuit Breaker program and (2) the new credit can be obtained only by filing a Maine income tax return, which was not required under the Circuit Breaker program.
- The sales tax rate was increased from 5% to 5.5%. The increase will be effective from October 1, 2013 through June 30, 2015.
- The sales tax net was cast wider. For example, it includes products transferred electronically.
- The sales tax rate on prepared meals and lodging was increased from 7% to 8% for the period from October 1, 2013 through June 30, 2015.
- The bill amended Maine’s standard deduction for joint filers so that it does not conform to the larger federal standard deduction that was permanently enacted as part of the ATRA. Maine’s standard deduction amounts for 2013 for joint filers and married individuals filing separate returns will be $10,150 and $5,075, respectively (in contrast to the corresponding federal amounts of $12,200 and $6,100).
- Maine’s itemized deductions will be limited to $27,500 for tax years beginning in 2013 and thereafter. The amount will be adjusted annually for inflation. The limitation could be substantially lower than federal itemized deductions, greatly impacting those who pay significant property taxes, have substantial mortgages, or make large charitable contributions. Planning tip: For the charitably inclined, this may increase the benefits of a relatively underused plan that allows direct transfers from IRAs to charitable organizations. Such transfers are available to individuals who are at least age 70 ½. They do not increase a taxpayer’s income, only to be offset with an itemized deduction; instead, the transfer is omitted from both. For that reason, unlike conventional contributions, this does not appear to be adversely affected by Maine’s new limitation.
- As mentioned above, the Capital Investment Credit was reduced, but renewed – but only for 2013. However, the bill “decouples” Maine’s tax law from the federal bonus depreciation, which was extended through 2014. Taxpayers must make an addition modification (increasing Maine taxable income) for the difference between the federal bonus depreciation and depreciation computed without the bonus. The adjustment is “recaptured” via a subtraction modification (decreasing Maine income) in subsequent years. In summary, this means Maine is allowing a method of enhanced depreciation to continue, but for not as long as allowed under federal laws. Also, Maine’s legislators are continuing a decade-long tradition of tweaking the manner by which it departs from federal depreciation laws. The method has changed every couple years or so, leaving multiple methods still in use and resulting in very cumbersome record-keeping requirements.
While interesting to watch the budget approval play out in the news (veto, override, etc.), it now is law and it contains several significant changes to our tax laws. Please contact Merrill Barter or your Baker Newman Noyes tax advisor with any questions, or to discuss how these changes may impact your individual tax situation.
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.
IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.