On May 22, Maryland Governor Martin O'Malley signed extensive tax reform legislation, which includes personal income tax rate increases and reductions in or eliminations of exemptions for individuals with Maryland taxable income over $100,000 and joint filers with Maryland taxable income over $150,000.1 The legislation also repeals the corporate income tax credit for telecommunications property taxes, as well as the sales and use tax exemption for demurrage charges. Finally, the legislation amends the recordation tax and increases the tax on "other tobacco products." The collective effect of these changes is intended to raise significant revenue for the state.
Personal Income Tax
The legislation retroactively increases the personal income tax rate for some taxpayers, reduces or eliminates the personal and dependent exemption amounts and includes an addback for electing small business trusts.
Beginning with the 2012 tax year, the personal income tax rates have increased for individuals with Maryland taxable income of over $100,000 and joint filers with Maryland taxable income of over $150,000.2 A new maximum rate of 5.75 percent applies to income in excess of $250,000 for individuals or $300,000 for joint filers.
As amended, the personal income tax rates for Maryland taxable income over $100,000 (for individuals) or $150,000 (for joint filers) are as follows:
- 5 percent: For Maryland taxable income from $100,001 to $125,000 (individuals) or $150,001 to $175,000 (joint filers) (prior to amendment, the income ranges for the 5 percent rate were $150,001 to $300,000 (individuals) and $200,001 to $350,000 (joint filers));
- 5.25 percent: For Maryland taxable income from $125,001 to $150,000 (individuals) or $175,001 to $225,000 (joint filers) (prior to amendment, the income ranges for the 5.25 percent rate were $300,001 to $500,000 (individuals) and $350,001 to $500,000 (joint filers));
- 5.5 percent: For Maryland taxable income from $150,001 to $250,000 (individuals) or $225,001 to $300,000 (joint filers) (prior to amendment, the 5.5 percent rate applied to income over $500,000 (for both individual and joint filers)); and
- 5.75 percent: For Maryland taxable income over $250,000 (individuals) or $300,000 (joint filers).3
Personal and Dependent Exemption Amounts Reduced or Eliminated
Generally, taxpayers are allowed a $3,200 personal exemption from tax, as well as for each dependent,4 though such amount has been limited in recent years once federal adjusted gross income reached certain levels. Beginning with the 2012 tax year, the maximum amount allowed as a personal and dependent exemption has been reduced for individuals with federal adjusted gross income for the taxable year greater than $100,000 and joint filers with federal adjusted gross income for the taxable year greater than $150,000.5 The new exemption amounts are limited to the following:
- $1,600 (previously, $2,400) if federal adjusted gross income is greater than $100,000 but not greater than $125,000 (individuals) or is greater than $150,000 but not greater than $175,000 (joint filers);
- $800 (previously, $1,800) if federal adjusted gross income is greater than $125,000 but not greater than $150,000 (individuals) or is greater than $175,000 but not greater than $200,000 (joint filers); and
- $0 (previously, $1,200) if federal adjusted gross income is greater than $150,000 (individuals) or is greater than $200,000 (joint filers).6
Temporary Waiver of Interest or Penalties
As these changes are effectively being imposed on a retroactive basis to the beginning of 2012, for calendar year 2012 only, the Comptroller must waive interest and penalties on individual estimated tax to the extent that the interest or penalty would not have been incurred but for the increase in the tax rates or reduction in the exemption amount for calendar year 2012.7
Electing Small Business Trusts
For tax years beginning after 2012, a fiduciary must add back the amount of income of an electing small business trust, derived from stock in an S corporation, when calculating its federal adjusted gross income.8
Corporate Income Tax Credit for Telecommunications Property Taxes Repealed
For tax years beginning after 2011, the credit against the corporate income tax "in an amount equal to 60% of the total state, county and municipal corporation taxes paid by the public utility [telecommunications company] during the taxable year on its operating real property in the state ..." is repealed.9 Therefore, beginning with the same tax year, the requirement to add back to federal taxable income any credits for property taxes paid on the operation of real property by a telecommunications company that is a public utility is also repealed.10
Sales and Use Tax Exemption for Demurrage Charges Repealed
Effective July 1, 2012, a demurrage charge for the failure to return a gas cylinder within a designated period is no longer exempt from sales and use tax.11
Effective July 1, 2012, the recordation tax statute is amended to provide that a secured debt, with respect to an indemnity mortgage,12 is deemed to be incurred when a debt is incurred on the guaranteed loan.13 It is incurred to the same extent as the debt incurred on the guaranteed loan. Therefore, for instruments recorded on or after July 1, 2012, the recordation tax applies as though the guarantor were primarily liable for the guaranteed loan. However, the tax does not apply to the extent that it is paid on another instrument of writing that secures payment of the guaranteed loan. Additionally, the tax does not apply to an indemnity mortgage securing a guarantee of repayment of a loan less than $1 million.
Tax on "Other Tobacco Products" Increased
Effective July 1, 2012, the tobacco tax rate for "other tobacco products" (tobacco products other than cigarettes) will increase from 15 to 30 percent of the wholesale price of tobacco products.14 The Comptroller may provide for an "alternate method of assessing and collecting the additional tax," but the additional tax must be remitted to the Comptroller by October 15, 2012.15
In addition, also effective July 1, 2012, the tobacco tax rate on cigars will be 70 percent of the wholesale price of the cigars but for premium cigars, the tax rate will be 15 percent of the wholesale price.16
The personal income tax increase for individuals with higher amounts of income follows the lead of several states (primarily on the east and west coasts). Although these typically are termed "millionaires' taxes," the amount of income subject to the tax rate increases in Maryland is far below the income typically associated with a "millionaire." Also, the reduction or elimination of the personal and dependent exemption amounts will further increase the tax liability for many of the same taxpayers. Because these changes are effective for the 2012 tax year, a sufficient amount of taxes may not have been withheld for taxpayers subject to the new higher rates and lower exemption amounts. While the Comptroller will temporarily waive the interest or penalties associated with insufficient estimated taxes due to these changes, many taxpayers will be faced with a tax liability because tax was withheld at the lower tax rates that were in effect for 2012 prior to this legislation.
Although tax rates of 5 percent to 5.75 percent in the high-income brackets may not seem particularly high, the overall tax rate is substantially higher because Maryland counties and Baltimore City also impose non-creditable local income taxes that range from 1.25 percent in the least populous areas to 3.2 percent in the most populous areas, including the Washington, DC suburbs.17 For example, an individual who resides in Montgomery County and has Maryland taxable income of $105,000 would be subject to an actual tax rate of 8.2 percent (5 percent state rate plus 3.2 percent local rate) on income over $100,000.
The tax reform package, according to the Maryland Department of Legislative Services' Fiscal and Policy Note, is expected to increase total state revenues by over $250 million in fiscal year 2013.18 The new provisions and amendments are mostly aimed at enhancing state or local revenue, while expenditures are generally unaffected. Small businesses with higher amounts of taxable income may be negatively impacted by the new legislation as it has the effect of increasing income tax liabilities. Further, given Maryland's relatively close proximity to several states with lower personal income tax rates, including Virginia, West Virginia and Delaware, the Maryland tax rate increases may entice some high-income individuals to move out of the state.
1 Ch. 2 (S.B. 1302), Laws 2012, First Special Session.
2 MD. CODE ANN., TAX-GEN § 10-105(a).
3 Id. Note that different tax rates applied to Maryland taxable income over $500,000 for tax years beginning in 2008, 2009 and 2010. During this period, a 5.5 percent rate applied to Maryland taxable income of $500,001 to $1 million and a 6.25 percent rate applied to Maryland taxable income over $1 million.
4 MD. CODE ANN., TAX-GEN § 10-211(a)(1), (2).
5 MD. CODE ANN., TAX-GEN § 10-211(b).
6 Id. Prior to amendment, the exemption amount also was limited to $600 if federal adjusted gross income was greater than $200,000 (individuals) or was greater than $250,000 (joint filers).
7 S.B. 1302, § 7.
8 MD. CODE ANN., TAX-GEN § 10-204(k). This applies to an "electing small business trust" as defined under IRC § 1361(e)(1) that is subject to the special taxing rules under IRC § 641(c).
9 S.B. 1302, § 5, repealing MD. CODE ANN., TAX-GEN § 10-708.
10 S.B. 1302, § 5, repealing MD. CODE ANN., TAX-GEN § 10-306(c).
11 S.B. 1302, § 6, repealing MD. CODE ANN., TAX-GEN § 11-202.
12 MD. CODE ANN., TAX-GEN § 12-105(f)(7). An indemnity mortgage includes any mortgage, deed of trust, or other security interest in real property that secures a guarantee of repayment of a loan for which the guarantor is not primarily liable.
14 MD. CODE ANN., TAX-GEN § 12-105(b).
15 S.B. 1302, § 8.
16 MD. CODE ANN., TAX-GEN § 12-105(b).
17 The local tax rates are listed in the instructions for Form 502D, Maryland Personal Declaration of Estimated Income Tax.
18 Fiscal and Policy Note for S.B. 1302, Department of Legislative Services, Maryland General Assembly, May 15, 2012.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.