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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 deductionA tax deduction allows taxpayers to subtract certain deductible expenses and other items to reduce how much of their income is taxed, which reduces how much tax they owe. For individuals, some deductions are available to all taxpayers, while others are reserved only for taxpayers who itemize. For businesses, most business expenses are fully and immediately deductible in the year they occur, but others, particularly for capital investment and research and development (R&D), must be deducted over time. 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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