AMT Fix Now Even More Important for Maryland Given Income Tax Hike

November 19, 2007

The State of Maryland is already one of the hardest hit states by the alternative minimum tax due to its high-income profile and high taxes on income and property. But now that a tax hike bill has been approved by the legislature and will likely be signed by Gov. O’Malley, the AMT is set to hit Marylanders even harder.

Raising the state income tax from 4.75 percent to three new rates of 5, 5.25, and 5.5 for higher income residents will increase the state income tax deduction that people can take on their federal tax return, thereby essentially making the rest of the country bear part of the burden of Maryland’s tax hike. (That’s one reason why the Tax Foundation opposes the state and local tax deduction to begin with.) However, AMT takes that deduction away from taxpayers, and raising that deduction further in Maryland will mean more taxpayers will have their AMT liability exceed their regular tax liability, thereby forcing them into AMT.

It should be made clear that no Marylander will explicitly pay a higher federal tax bill as a result of O’Malley’s plan. However, especially if nothing is done to limit AMT at the federal level next year, Marylanders who are facing a higher income tax bill from Annapolis next year should not expect a guarantee that they will be able to deduct those higher taxes paid on their federal income tax returns.

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