Are you expecting a tax increase or decrease this year? Given the overhaul in tax rates and deduction limits; many of us are anxiously awaiting the results of our completed returns. It’s hard to say what the results might be, as the passage of Tax Cuts and Jobs Act resulted in several changes which might move you in opposing directions depending on your circumstances.
There is the obvious impact of lower tax rates:
However, The SALT (State and Local taxes) deduction is now capped at $10,000 so you may squeak into the next income bracket and miss the benefit of those lower rates. Before the passage of Tax Cuts and Jobs Act, if you itemized deductions on your Federal return, you could deduct the full amount of the state income and property taxes you paid during the year. For a high-income taxpayer in a state with high income taxes (i.e. MD), this often resulted in a big Federal deduction.
Of course, the Federal standard deduction nearly doubled in 2018 to $12,000 for single filers and $24,000 for married filers filing jointly. Many of us will now take the standard deduction, especially given the limited amount of our eligible itemized state and local taxes.
However, electing the standard federal deduction potentially impacts your deduction method at the state tax level! Maryland only allows taxpayers to itemize if they do so on their federal return. Alternatively, if a taxpayer takes the standard deduction on the federal return, he or she must take the standard deduction on the Maryland return as well. The standard deduction for MD is much lower than the standard federal deduction!
Given that these changes would likely result in an increase in MD state taxes, MD increased the 2018 standard deduction to $2,500 (up $500 for single filers) and $5,000 (up $1000 for joint filers). However, these modest increases may not offset the loss of thousands of dollars in previously allowed deductions.
MD State tax rates start at 2% and increase to a maximum of 5.75% (MD State Tax Rates) on incomes exceeding $250,000. Add in another 2.5% of local tax for Anne Arundel County and (MD Local Tax Rates) a loss of even $10,000 in state deductions could result in $800 of additional tax payments!
So, what does this mean for you? Consult closely with your tax professional to understand your optimal deduction selections.
· There may be cases where it makes sense to take the lower itemized federal deduction in order leverage the itemized deductions on your state returns.
· Other planning opportunities may include bunching your deductions so every other year you can benefit from the itemized deduction on the federal and state returns.
Happy Tax Season!
At RCS we do not prepare tax forms; we do however offer our clients tax planning services and projections throughout the year, so they are not surprised on April 15th!