Maryland Itemized Deductions in 2021
As part of our wealth management services for our clients, we review their previous year's tax returns and project future taxes to identify missed tax savings and tax planning strategies down the road. When reviewing a tax return for a new client, we recently discovered their tax preparer defaulted to the Federal Standard Deduction as it was slightly higher than their Itemized Deductions. And, while the Standard Deduction did save them $70 of Federal taxes, it caused them to overpay Maryland by $1,695! Read on to understand how this happened.
Can I Itemize Deductions in Maryland for 2021?
For Federal taxes, the choice to itemize or use the standard deduction is usually an easy one. If your itemized deductions are higher than the standard deduction, then you itemize. Well, with the passage of the 2018 Tax Cuts and Jobs Act, the choice is no longer that simple.
Itemized Deductions Before the Tax Cuts and Jobs Act
Before the 2018 Tax Cuts and Jobs Act, taxpayers were able to itemize and deduct their state taxes on their federal returns. These deductions included state income taxes paid (or, in some cases, state sales taxes paid) and state real estate taxes. For high-income taxpayers, this was a substantial deduction and favorably impacted overall tax liability.
However, the Tax Cuts and Jobs act included limitations on these state tax deductions, now known as SALT limitations. Taxpayers may now deduct a maximum amount of $10,000 for state and local taxes. The SALT limitation, along with the elimination of miscellaneous itemized deductions, has dramatically reduced total itemized deductions for many taxpayers.
Should I Itemize or Take the Standard Deduction on my Federal Return?
Most taxpayers believe this is an easy question to answer. If your itemized deductions are higher than the standard deduction, take the itemized deductions. And, conversely, if the standard deduction is higher than the itemized deductions then take the standard deduction—most tax software defaults to the higher deduction amount. However, for Maryland residents, this may not be your best choice!
Let's go back to our new client couple. Their itemized deductions, which included Maryland State Income and Real Estate taxes, mortgage interest, and charitable contributions, totaled $27,384. Thus, their itemized deductions were $16 less than the $27,400 (slightly higher due to their age) federal standard deduction. Taking the standard deduction lowered their federal taxes by $70. Most taxpayers and most tax software (and unfortunately, even some tax preparers) will default to the standard deduction since it's the higher amount and reduces the overall federal income taxes.
How the Federal Deduction Decision Affects Maryland
This leads back to the initial question; can I itemize my Maryland deductions? Maryland forces taxpayers to use the same deduction method as they used on their Federal tax return. Meaning, if you use the standard deduction for your federal taxes, you must use the standard deduction on your Maryland taxes. For a married couple, the 2020 Maryland standard deduction is $4,550.
Let’s return to our new client couple. Since their tax preparer used the standard deduction for their federal taxes, they must use the standard deduction on their Maryland taxes, giving them a $4,550 deduction. However, what if they took the lower itemized deduction amount on their Federal return? While they would owe $70 more in federal taxes, their Maryland taxes are reduced by $1,695. The lower federal itemized deduction amount results in $1,625 less tax due overall because of the higher Maryland itemized deductions!
Analyzing for Maryland Itemized or Standard Deductions
So what can you do? When preparing your taxes, we recommend using both deduction methods to determine the best way for your tax return. You may even save yourself money!
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