Potential Refund of Maryland Income Tax
Based on a recent decision of the United States Supreme Court, there is a potential refund available for certain Maryland income tax returns. In the case of Comptoller of the Treasury of Maryland v. Wynne (“Wynne”), the Supreme Court held that the State of Maryland improperly limited the amount of credit allowed for income tax paid to another state that was taxed in both states.
Sometimes, a Maryland taxpayer may have income that is also taxed by another state (or the District of Columbia), such as income from a partnership doing business in another state. The taxpayer is entitled to a credit for one state’s tax paid, so that the same income isn’t taxed twice. Until now, this is how Maryland handled this credit. Initially, all of a Maryland resident’s income, from whatever source, is treated as taxable for the Maryland income tax. This is accomplished by starting off (on the Maryland tax return) with the “adjusted gross income” reported on the federal tax return. If a Maryland resident has income that is also taxable in another jurisdiction, that would mean that the same income is taxed twice at the state level. To remedy this, Maryland, as the taxpayer’s home state, allows a credit for a portion of the Maryland tax that is duplicated by the other state’s tax. This is calculated and reported on a Maryland Form 502CR, and the amount of credit calculated is then subtracted from the Maryland income tax otherwise payable.
Maryland has both a state income tax and a local income tax. The state tax is at a graduated rate with a maximum rate of 5.75% (for taxable income above $300,000 for joint returns, $250,000 for single taxpayers), and the local rate varies among the counties (and Baltimore City) from a low of 1.25% (Worcester County) to 3.2%. The combined state and local taxes is the amount payable on your Maryland income tax return. The amount of credit for tax paid to another state is calculated by determining what the Maryland tax would be without including the income taxable by the other state. That calculated difference in Maryland tax (or the amount of the tax paid to the other state, if that is less than the calculated difference) is the amount allowed as a credit.
However, until now, Maryland only allowed the calculation of the credit to the extent of the Maryland state tax, and not the local tax. For instance, assume that the total Maryland tax on income that is taxed in another state is $2,500 ($1,500 state tax plus $1,000 local tax) and the tax paid to the other state is $2,600. Under Maryland’s current practice, the amount of credit would be limited to the difference in state tax, $1,500, even though a total of $2,500 was paid to Maryland on this income that was also taxed by the other state (for which the taxpayer already paid $2,600). The Supreme Court held that this was unconstitutional. Now, as a result of Wynne, the taxpayer is entitled to a credit in the total amount of both state and local tax, $2,500, a refund of an additional $1,000.
A taxpayer is entitled to claim a refund of any additional local income tax credit, based on Wynne, for the years 2012-2014 (plus 2011 if an extension originally had been filed for that year’s return). This can be done by filing amended Maryland income tax returns, including a special form issued by Maryland as a result of Wynne. There are statutory limitations deadlines by which the amended tax returns have to be filed.
If you think that you might be entitled to a refund under Wynne, call Jonathan E. Greenstein, Esquire, at Walsh & Company, P.A., at (410) 312-5690.