Maryland Taxpayers: Risk of Standard Deduction
Some Maryland taxpayers are better off itemizing their deductions for 2018 even if their itemized deductions fall short of the federal standard deduction.
Since Congress passed the TCJA in 2017 there was (and continues to be) lots of talk of the $10,000 limit placed on the deductibility of state income taxes and the impact it will have on high-income taxpayers in higher-tax states. We know these taxpayers often took advantage of the large deductions available at the federal level when choosing to itemize. Alternatively, we haven’t seen much coverage on another potential tax increase for many of the same taxpayers in high-tax states like Maryland. Choosing to take the federal standard deduction may reduce our federal tax liability but in turn, result in a significantly larger increase to our Maryland income tax liability.
We know the newly increased standard federal deduction – coupled with limitations on various deductions – results in more taxpayers selecting the standard deduction on their federal returns. Why is this a problem? Maryland does not allow you to itemize deductions on your state return unless you also itemize on your federal return. And there’s a large discrepancy between the federal standard deduction ($24,000) vs. the Maryland standard deduction ($4,500).
So, the decision to itemize may result in the state return savings outweighing the reduced federal tax liability of the standard deduction. Let’s look at an example:
A married couple filing jointly with a federal marginal rate of 22% and Maryland combined marginal rate of 8%.
- Real estate taxes: $8,000
- Mortgage interest: $12,000
- Charitable contributions: $1,000
- State & local income tax withheld: $16,000
Total federal itemized deductions are $23,000 (after the new $10,000 SALT limitation)
Total Maryland itemized deductions are $21,000 (state and local income tax have never been deductible on the state return)
If these hypothetical taxpayers itemize their deductions on their federal return, they’ll pay an additional $220 (22% times the difference between standard vs. itemized deductions) on their federal return. However, they’ll see a savings of $1,320 on their Maryland return (8% times the difference between MD standard vs. itemized deductions). In other words, they would have lost more than $16,000 in deductions on the MD return if they chose to use the standard deduction.
So, Maryland taxpayers, be sure to run your income tax returns under both deduction methods to see which one creates the lowest overall tax liability. And consider bunching your deductions so every other year you can benefit from the itemized deduction on the federal and state returns.
For our DC clients, this issue won’t apply to you because the district allows you to choose itemization regardless of whether you chose the standard deduction at the federal level. Virginia, on the other hand, has the same forced itemization limitation as Maryland but a larger state standard deduction ($6,000). So, we anticipate the biggest local impact on our clients that live in the Old Line State.