The Maine Legislature overrode Gov. Paul LePage’s veto of the budget bill that makes various amendments to the personal and corporate income tax laws, including (among other things) changes that reduce the personal income tax rates, modify the standard and itemized deductions, repeal numerous credits, create or adjust other credits, and exempt military retirement benefits. All changes apply to tax years beginning on or after January 1, 2016.
Provisions affecting the sales and use tax laws (TAXDAY, 2015/07/01, S.18) are covered separately.
Personal Income Tax Rates
The personal income tax rates are reduced, and new tax bracket amounts are established. Currently, there are two personal income tax brackets, with 6.5% and 7.95% rates. Under the new legislation, there will be three brackets, with rates of 5.8%, 6.75%, and 7.15% starting with the 2016 tax year. In addition, the threshold taxable income amount for the 7.15% bracket is increased beginning with the 2017 tax year (none of the rates are changed). The brackets will be adjusted annually for inflation thereafter.
Military Retirement Benefits
All retirement benefits received under a military retirement plan included in a taxpayer’s federal adjusted gross income will be excluded from Maine taxable income. “Military retirement plan” means retirement plan benefits received as a result of service in the active or reserve components of the Army, Navy, Air Force, Marines or Coast Guard.
Standard and Itemized Deductions
Several changes to the standard deduction and itemized deduction rules are enacted. For instance, the Maine standard deduction will no longer be based on the federal standard deduction amounts. Instead, there will be a “basic” Maine standard deduction of $11,600 for single taxpayers and married persons filing separate returns, $17,400 for taxpayers filing as heads of household, and $23,200 for taxpayers filing married joint returns or surviving spouses (these dollar amounts will be adjusted annually for inflation). In addition to the basic standard deduction, an “additional” Maine standard deduction for elderly or blind taxpayers will be allowed that is equal to the federal deduction allowed under IRC §63(c)(3).
With regard to itemized deductions, the legislation repeals the exception to the itemized deductions limitation applicable to charitable contributions that was to apply to tax years beginning after 2015. In addition, because the credit for contributions to a family development account reserve fund has been repealed (see below ), the statutory provision requiring a reduction of a taxpayer’s itemized deduction for family development account contributions is also repealed.
Furthermore, the value of the standard deduction amount or itemized deduction amount, whichever applies, will be phased out for taxpayers with Maine adjusted gross income exceeding $70,000 for single individuals and married persons filing separate returns, $105,000 for individuals filing as heads of households, and $140,000 for individuals filing married joint returns or as a surviving spouse. The specified dollar amounts are indexed annually for inflation.
Long-Term Care Insurance Deduction
The deduction for long-term care premiums paid by a taxpayer is repealed.
529 Plan Contribution Deduction
The deduction for contributions (up to $250 per beneficiary) to IRC §529 college tuition plans is repealed.
Elimination of Credits
The following credits are repealed:
— jobs and investment credit;
— employer-assisted day care credit;
— employer-provided long-term care benefits credit;
— high-technology investment credit;
— dependent health benefits credit;
— quality child care investment credit;
— biofuel commercial production credit;
— family development account contributions credit;
— retirement and disability credit; and
— forest management planning credit.
The carryforward of unused credit amounts for tax years beginning after 2015 is retained for all credits, except for the family development account contributions credit, the retirement and disability credit, and the forest management planning credit.
Sales Tax Fairness Credit
A new refundable “sales tax fairness credit” against the personal income tax is available beginning with the 2016 tax year. The credit is based on the number of persons claimed as dependents on an income tax return, and it is phased out as family income increases. The base credit is equal to $125 if one personal exemption is claimed on a return, $175 if two personal exemptions are claimed, $200 if three personal exemptions are claimed, and $225 if four or more personal exemptions are claimed (personal exemptions for individuals who are incarcerated are not included). The credit allowed under this section is phased out as follows (the dollar amounts will be adjusted annually for inflation):
— for single filers, the credit is reduced by $10 for every $500 or portion thereof that exceeds $20,000 of modified federal adjusted gross income (AGI);
— for heads of households, the credit is reduced by $15 for every $750 or portion thereof that exceeds $30,000 of modified federal AGI; and
— for joint filers and surviving spouses, the credit is reduced by $20 for every $1,000 or portion thereof that exceeds $40,000 of modified federal AGI.
Nonresidents and married taxpayers filing separate returns may not claim the credit. Part-year residents can claim the credit on a prorated basis.
Educational Opportunity Credit
The legislation expands eligibility for the educational opportunity credit to individuals graduating with an associate or bachelor’s degree from a non-Maine school and to individuals graduating with a graduate degree from a Maine school.
Refundability of Child Care Credit and Earned Income Credit
The Maine child care credit is no longer refundable for nonresident taxpayers. On the other hand, the earned income credit is converted to a refundable credit for tax years beginning after 2015.
Payments to Maine College Savings Program
Lump-sum deposits to the Maine College Savings Program will no longer be made through the assignment of state tax refunds.
L.D. 1019 (H.P. 702), Laws 2015, applicable to tax years beginning on or after January 1, 2016