Maine Makes Favorable Changes to Individual, Fiduciary and Estate Tax Laws

By Merrill Barter October 30, 2011

This summer, the State of Maine enacted budget legislation (L.D. 1043) significantly affecting various Maine tax laws.  A previous article addressed some of the changes that primarily impacted businesses.  This article will discuss some of the legislative provisions that will benefit individual and fiduciary taxpayers and estates, and (similar to the changes impacting businesses) promote capital investment in Maine.

Background

Since 2002, Maine and many other states have “decoupled” from federal tax laws allowing individual taxpayers an immediate deduction of the cost of certain fixed asset acquisitions used in a trade or business.  This has required taxpayers to make often significant “add-back” adjustments in the year of purchase (typically from a Schedule C business, or ownership in flow-through entities) that increase taxable income for Maine purposes.  Maine’s individual “standard deduction” and personal exemptions historically have been less than the comparable federal deductions.  The new budget legislation increases Maine’s tax deductions for capital expenditures, conforms Maine’s standard deduction and exemption amounts to the federal amounts, and creates more favorable tax rate structures for individuals, fiduciaries and estates.

Deductions related to capital investment

The following changes that apply to business (corporate) taxpayers also apply to individual and fiduciary taxpayers.  These provisions were discussed in our previous article, which can be found here.

• Maine Capital Investment Credit – for tax years beginning on or after January 1, 2011, taxpayers that claim a bonus depreciation deduction on their federal tax return for new property placed in service in Maine during the tax year are entitled to a Maine income tax credit equal to 10% of the federal bonus amount deducted.
• Section 179 allows businesses to deduct the full cost of qualifying equipment in the year of purchase.  For tax years beginning after 2010, Maine law conforms to the federal deduction amounts.  Based on federal law, a deduction as large as $500,000 is available for 2011.
• Maine New Markets Capital Investment Program provides a credit for individuals who invest in “qualified community development entities.”  The credit is equal to 39% of the qualified amount invested, and is spread over a 7-year period with 7% allowed in year 3, and 8% in each of years 4 through 7.

Other Changes Impacting Individual and Fiduciary Taxpayers

In addition to the benefits related to capital investment, the budget legislation includes numerous other changes that will be beneficial to individual and fiduciary taxpayers.

The following changes apply to years beginning on or after January 1, 2012:

• For individual taxpayers, the Maine standard deduction will increase to equal the federal amount.
• The Maine alternative minimum tax is repealed for non-corporate taxpayers.
• Mortgage insurance premiums can be included in itemized deductions to the extent deducted for federal purposes.
• The Maine tax addition on certain lump-sum and early retirement plan distributions is reduced from 15% to 7.5% of the federal tax amounts.  This Maine tax addition is repealed entirely for tax years beginning after 2012.

For tax years beginning on or after January 1, 2013, a new tax rate schedule will be effective for individual and fiduciary taxpayers.  The 2% bracket is eliminated, a 6.5% bracket is created, and the top marginal rate is reduced from 8.5% to 7.95%.  The potential tax savings for a married couple filing a joint return with Maine taxable income of $100,000 is approximately $650.  Also, for individual taxpayers for years beginning on or after January 1, 2013, Maine’s personal exemption will equal the federal exemption.

Estate tax

The legislative changes related to the estate tax are quite significant.  First, for estates of decedents dying on or after January 1, 2011, the Maine deduction for Qualified Terminable Interest Property (QTIP) conforms to the federal deduction.  For estates of decedents dying after December 31, 2012, the exclusion amount doubles – from $1 million to $2 million.  And beginning in 2013, a progressive rate structure applies, with a bottom rate of 8% on Maine taxable estates greater than $2 million, and a top rate of 12% on taxable estates valued at more than $8 million.

Conclusion

The changes made by the 2011 budget legislation are significant and beneficial to Maine taxpayers.  They will reward investment in Maine, improve the State’s reputation with regard to its individual income tax structure, and are designed to entice Maine’s retirees to remain here.  These changes may present tax planning opportunities, and we encourage you to contact us if you would like to discuss these changes in more detail.