Maryland Itemized Deductions in 2020
Can I Itemize Deductions in Maryland for 2020?
This is a question we often hear from our clients. For Federal taxes, the choice to itemize or use the standard deduction is usually an easy one. If your itemized deductions are higher than the standard deduction, then you itemize. Well, with the passage of the 2018 Tax Cuts and Jobs Act, the choice is no longer that simple.
Itemized Deductions Before the Tax Cuts and Jobs Act
Before the 2018 Tax Cuts and Jobs Act, taxpayers were able to itemize and deduct their state taxes on their federal returns. These deductions included state income taxes paid (or, in some cases, state sales taxes paid) and state real estate taxes. For high-income taxpayers, this was a substantial deduction, and favorably impacted overall tax liability.
However, the Tax Cuts and Jobs act included limitations on these state tax deductions, now known as SALT limitations. Taxpayers may now deduct a maximum amount of $10,000 for state and local taxes. The SALT limitation, along with the elimination of miscellaneous itemized deductions, has dramatically reduced total itemized deductions for many taxpayers.
Should I Itemize or Take the Standard Deduction on my Federal Return?
Most taxpayers believe this is an easy question to answer. If your itemized deductions are higher than the standard deduction, take the itemized deductions. And, conversely, if the standard deduction is higher than the itemized deductions then take the standard deduction—most tax software defaults to the higher deduction amount. However, for Maryland residents, this may not be your best choice!
Let’s use a fictitious retired Maryland couple as an example. In 2020, this couple paid $7,500 in Maryland state income taxes and $3,000 in real estate taxes. SALT limits their state tax deduction to $10,000. After adding in their mortgage interest and charitable contributions, their total itemized deductions are $26,400. Their itemized deductions are $1,000 less than their $27,400 standard deduction (higher amount due to their age). Taking the standard deduction reduces their federal taxes by $220 versus itemizing. Most taxpayers and most tax software will default to the standard deduction since it’s the higher amount and reduces the overall federal income taxes.
How the Federal Deduction Decision Affects Maryland
This leads back to the initial question; can I itemize my Maryland deductions? Maryland forces taxpayers to use the same deduction method as they used on their Federal tax return. Meaning, if you use the standard deduction for your federal taxes, you must use the standard deduction on your Maryland taxes. For a married couple, the 2020 Maryland standard deduction is $4,550.
Let’s return to our fictitious couple. Since they used the standard deduction on their federal taxes, they must use the standard deduction on their Maryland taxes, giving them a $4,550 deduction. However, what if they took the lower itemized deduction amount on their Federal return? While they would owe $220 more in federal taxes, their Maryland taxes are reduced by $896. Taking the lower federal itemized deduction amount results in $676 less tax due overall because of the higher Maryland itemized deductions.
Analyzing for Maryland Itemized or Standard Deductions
Keep in mind our fictitious couple is a straightforward example. When preparing your taxes, we recommend using both deduction methods to determine the best way for your tax return. You may even save yourself money!