Categories
Maine

Maine Property Tax Fairness Credit

Maine income tax returns saw a number of changes for the 2013 tax year, including a major revision to the state’s property tax refund program.  In the past, taxpayers needed to file for the property tax and rent “circuitbreaker” relief on a separate application from their income tax return.  For 2013 and later years, that program has been replaced by the Property Tax Fairness Credit.  Certain Maine taxpayers are now able to claim a credit on their state income tax return for a portion of their property taxes or rent paid.Photo of 384 Court Street Auburn, ME 04210

Under the new rules, taxpayers who are Maine residents for at least part of the year and who lived in a home in Maine that they owned or rented can qualify for the credit if they had a Maine adjusted gross income of $40,000 or less and paid more than 40% of their Maine adjusted gross on rent or more than 10% of it on property taxes.

For a taxpayer with a Maine adjusted gross income of $40,000, the credit would likely be available if their property taxes were more than $4,000 a year or their rent was more than $1,250.  This means that the taxpayers most at-risk for overlooking this credit are retirees who have social security or pension income that gets reduced or ignored for figuring Maine income, but may still have a high rent or property tax burden. This credit is generally not available for taxpayers in subsidized housing, unless they also received social security disability income.

This credit is new and hasn’t received a lot of press, so it’s fairly easy to overlook.  Taxpayers who are worried that they might have missed out on this credit should double-check their Maine returns, especially since up to $400 of the credit may be refundable.  That means that the taxpayer may get that much back, even if he or she had no Maine tax withheld during the year.

The Maine Revenue service has a page about the property tax fairness credit, and the worksheet used to calculate it is available on the Maine Revenue Service website.

 

Categories
Federal Income Tax

Marriage, Income Tax, and Obamacare

Living together for an extended time without marriage is an increasingly popular choice in Maine, but the decision to marry or not to marry can have significant financial consequences.   Marriage in the United States provides a number of economic benefits that couples don’t get when they choose to start and raise families as legally single people living under one roof.  These benefits can include income tax savings, access to additional social security income, and insurance savings.  Younger couples may reap financial aid benefits if attending college, and families who have accumulated some wealth may save money on estate tax or administrative costs.  Without the benefits of a legal marriage, Mainers who choose to co-habitate are likely to grow poorer over time than than their married counterparts, but there are some major exceptions to that rule.  This post will focus on the tax effects of remaining unmarried.

The tax effects of marriage can break either way, but, but they tend to be favorable.  The bottom tax brackets for married couples filing jointly are twice as wide as the brackets for single people.  The limits for most deductions and credits are also twice as high for married taxpayers filing jointly.  If both spouses have the same income, their taxes filing jointly are generally no worse than if they not gotten married, but if one spouse earns much more than the other, being married will usually yield a lower tax.  In extreme cases, the difference might be over ten thousand dollars for a high earner and a homemaker.   However, there are circumstance when the opposite is true.  When there’s a child involved, social security benefits, or another complicating factor, staying single may provide an edge over being married.

When incomes are unequal, marriage provides the greatest benefit.  This is because the higher earning spouse gets to make use of the higher married-filing-jointly  tax brackets and credit phase outs that would otherwise been wasted.  Consider a family whose only income comes from wages, and who earns the median family income for Auburn, Maine of about $41,000.  We’ll keep things simple by also having them take the 2013 standard deduction of $12,200.    Whether this income is earned by one spouse or earned equally by both, the taxpayers would pay a total of $2,261 in tax if filing jointly.  If they were not married and each filed their own returns, the split of the income would matter.  Two single taxpayers, each earning $20,500 would pay $1,133 each – basically half of the married couple’s tax.

Where they start to run into trouble is when they don’t both earn the same income.  If once spouse earns all of the money and the other is a homemaker, the earner faces a tax bill of $4,208.  When everything else about the couple remains the same, the decision not to get legally married costs them about $2,000 in unnecessary federal tax.  

If the couple has a child and the  earner qualifies as a head of household, he or she can use different tax brackets, and the  tax after considering the child tax credit drops to $2004.  If that same couple were married, they would receive both the child tax credit and the earned income credit, which would bring their net tax all the way down to $349.  This means that an unmarried couple with these facts would be giving up $1,650 in tax savings by raising a family and choosing to avoid marriage.

As I mentioned previously, the tax effects of marriage can break either way.  Consider a family with both adults working at a job that pays perhaps a little over $10 per hour, but which doesn’t give quite 40 hours a week.  This family might still earn $41,000, but that amount is now split evenly.  If they are not married, then only one gets to claim the child and file as a head of household.  That taxpayer would have both a refundable child credit and the earned income credit, for a net refund of $3,109 plus any amounts they might previously have had withheld during the year.  Their significant other would still be paying $1,133 as shown in one of the earlier examples above.  This family would have a net tax benefit, not cost, of about $2000, instead of the $350 they would have paid if they were married.  From a pure income tax basis, they would come out ahead, and that’s before factoring in the Affordable Care Act and the related tax credits.

Marriage and Obamacare

The unmarried couple where both adults earn $20,500 and have one child comes out ahead of a married couple when it comes to figuring their net tax or credit, but that’s before considering Obamacare.   If both adults were age 26, they would have an affordable care act premium around $5,792, and a tax credit of about $3,066 to drop the cost of health insurance down to $2,726 for the year.

Here’s what it would look like if they weren’t married.  The adult without the dependent would pay $3,251 for a silver-level plan, get a credit of $2,163 and have a net premium of $1,088.  The adult with the dependent would pay $5,266 for a year of health insurance, but would receive a tax credit of $4,856, bringing the cost down to just $410.  The net cost of insurance for this unmarried couple would be a mere $1,498.  That’s over $1,200 less than than if they were married.

For the couple with a child who both earn about 20,500, the cost of being married, after factoring in Obamacare, would be about $3,200 compared to staying single.

Similarly, the Affordable Care Act would amplify the price of remaining unmarried for the couple with uneven earnings.  Obamacare does not include a tax credit for individuals with no earnings, so there would be no tax credit for the homemaker.  He or she would pay $3,251 for health insurance with no tax credit.   The adult with the earnings and dependent would pay $5,266 for health insurance and have a tax credit to bring that down to $3,471.  Their combined premiums as an unmarried couple with a child would be $6,722.  That’s about $3,000 more than if they were married.  For the unequal earners, the total cost of staying single, including income taxes and lost ACA subsidies would be  around $4,700.  For the example of uneven earners without a child, the total difference would be around $5,000.

Summary

Few people base the decision on whether or not to marry on financial considerations, nor should they.  However, the financial impact of that decision can be significant and should not be overlooked.  The financial impact of choosing to marry or not has been amplified by the Affordable Care Act.  Generally, marriage has better tax and ACA subsidy effects for couples who have uneven incomes, and staying single is sometimes the better financial decision for couples with similar incomes and children.  There are also social security and other considerations, which will be topics for a different post.

This post is meant solely to provide information and is not a substitute for individualized advice, no matter how close any of the examples may be to a reader’s own tax situation.  When you are dealing with a complex tax question, there’s really no substitute for working with a qualified tax professional.  

Resources

These examples were developed using the Kaiser Family Foundation’s affordable care act calculator located at http://kff.org/interactive/subsidy-calculator/.  

The tax calculations were preformed using Drake Tax Software.

 

 

 

 

Categories
Income Tax Maine

Pine Tree Development Zone Income Tax Credit

Businesses that have been approved for Pine Tree Development Zone (PTDZ) status by the Maine Department of Economic and Community Development are eligible for an income tax credit designed to eliminate their Maine income tax on the additional activity that results from expanding their operations in qualifying industries in Maine.  This can be an extremely generous tax credit, but it requires more forethought than most other income tax benefits because the business must go through the application process before it hires the additional people or adds assets.

Calculating the Pine Tree Development Zone Tax Credit – Corporations

The basic calculation of the credit for C-corporations is fairly simple compared to the calculation for individuals and pass-through businesses.

  1. Calculate Maine income tax without regard for the PTDZ credit or any other Maine tax credits.
  2. Add up all of the additional Maine payroll and the value of all of the Maine property in the qualifying business activity since the company received its PTDZ certification.
  3. Add up all of the Maine property and payroll.
  4. Divide the amount from #2 by the amount from #3.  This is called the apportionment factor.
  5. Multiply the company’s income tax from step 1 the apportionment factor calculated in step 4.

Keep in mind that property the company owns is valued at cost, but property that the company leases is included in the calculation at a rate of 8-times its annual lease payment.  Note that real estate, personal property, leased property, and payroll all factor into this formula.  That means that a company which is adding a small number of qualifying jobs but making significant capital investments in the targeted industries can receive a credit against a substantial portion of its Maine income taxes.

Calculating the Pine Tree Development Zone Tax Credit – Pass-throughs

S-Corporations, partnerships, and LLCs with Pine Tree Development Zone businesses have no corporate-level income tax to take a credit against.  These businesses report their total income and their PTDZ income out to their owners.  The PTDZ income divided by the total income is called the apportionment factor, and is used at the individual level for calculating the income tax credit.

Calculating the Pine Tree Development Zone Tax Credit – Individuals

In addition to the regular PTDZ tax credit worksheet, individuals must include worksheet PTE and a copy of their Pine Tree Development Zone certificate with their  Maine income tax returns.  Worksheet PTE performs a two-step calculation.  First, it figures out what percentage of the taxpayer’s income comes from the PTDZ business and then multiplies that apportionment factor to determine the PTDZ tax credit from the business. The PTDZ credit cannot reduce Maine tax below zero and it cannot be carried forward to later years, but it is applied before all other tax credits.  This means that the PTDZ credit can cause other credits which are refundable or eligible to be carried forward to drive income tax below zero or provide a benefit in future years.

Tax Tip: Owners of PTDZ businesses who add funds to a tax deferred account such as an IRA, 401(k), SEP, Simple, or HSA can increase their PTDZ credit percentage for the year, which may make those accounts more attractive than they usually are because those contributions will reduce federal and Maine income tax without reducing the PTDZ tax credit.

The Pine Tree Development Zone Tax Credit – Multiple Businesses

The Maine income tax forms and guidance documents are silent about how an individual who owns interests in multiple PTDZ businesses should calculate the tax credit.  Each of the worksheets refers only to Pine Tree Development Zone Business in a singular sense.  This author believes that taxpayers who own interests in multiple PTDZ businesses should file separate worksheets to determine the credit separately for each business.  They should then include a statement totaling the credits attributable to each PTDZ business and report the total credit on schedule A of their Maine income tax returns.

Resources

Maine Revenue Service – Pine Tree Development Zone Tax Credit

Maine Revenue Service – Worksheet for claiming the income tax credit

Maine Revenue Service – Worksheet PTE

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Categories
Income Tax Maine

Pine Tree Development Zones

Maine Pine Tree Development Zones were originally select regions of the state where businesses who opened or expanded and added quality jobs were able receive special tax benefits.  The program has since been expanded to apply throughout Maine, although there are still two tiers of Pine Tree Development Zone.  The benefits are available for five years in Tier 1 and for 10 years in Tier 2.

Pine Tree Development Zone Benefits

Pine Tree Development Zone Benefits can reduce or eliminate income taxes on the additional profits a company generates by expanding in Maine.  The benefits of applying for and receiving PTDZ benefits and include a credit against corporate income tax, a credit against insurance premiums for financial services companies, a reimbursement for some of the state income tax resulting from the increase in activity, exemption from sales tax on business equipment purchases, exemption from sales tax on purchases that go into real estate improvements, and access to reduced electricity rates.  These benefits can be quite generous but the calculations involved can get fairly complicated, so they will be discussed in a separate blog post.

Qualifications

To qualify as a Pine Tree Development Zone Business, a company bust be operating in one of the following sectors:

  • Biotechnology
  • Aquaculture and Marine Technology
  • Environmental Technology
  • Advanced Technologies for Forestry and Agriculture
  • Manufacturing and Precision Manufacturing
  • Information Technology
  • Financial Services

Additionally, the company must be creating new “quality jobs” in Maine.  It cannot simply move jobs around within the state to claim PTDZ benefits, but it can relocate jobs from outside of the state to Maine.  To count as a “quality job”, the total compensation for the new employees must, including employer payments toward employee benefits, must be at least as much as the per-capita income for the county in which the job is created and the job must include access to a group health plan and a retirement plan subject to ERISA.

Application Process

A company cannot simply hire a new employee and claim PTDZ benefits.  To claim PTDZ benefits, a company needs to get certified as a PTDZ business by the Maine Department of Economic and Community Development (DECD).   Prior to announcing its plans to expand publicly, the company must write a letter to the DECD stating that they would not be creating the new jobs without the PTDZ benefits.  Once the DECD acknowledges the letter, the company can then complete an application for PTDZ benefits.  There are DECD representatives available to help business who are considering expanding in Maine apply for PTDZ benefits, and any business considering

Resources

Maine Department of Economic and Community Development –  “Governor’s Account Executives”

Maine Department of Economic and Community Development – PTDZ Benefits

Per-Capita Personal Income Table

 

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Categories
Income Tax Maine

Maine High Technology Investment Tax Credit

The High Technology Investment Tax Credit is a credit against Maine income tax for the cost (or, if depreciation has been claimed in a different jurisdiction, the remaining basis) of eligible equipment that is placed into service in Maine and used in a “High-technology activity.”  ”High Technology Activities” are defined as  the design, creation, and production of computer software, computer equipment, supporting communications components and other accessories that are directly associated with computer software and computer equipment or the provision of internet access services and advanced telecommunications services.

 

High Technology Equipment

Computer equipment, electronics components and accessories, communications equipment and computer software all qualify for the credit if more than 50% of their use is for a “high technology activity.”  Leased equipment can also qualify.  Normally, the lessee or sublessee (the end-user of the equipment) claims the credit, but they also have the ability to waive the credit and allow the lessor to claim it instead.

If the credit is claimed by a lessee who deduct the lease payments as they make them, then the credit is available for the amount of the lease payments made each year.  If the taxpayer accounts for the property as a capital lease for tax purposes, then the credit is figured as though they had purchased the equipment.  If the lessor claims the credit,  lease payments received in the year that the equipment is placed in service reduce the cost eligible for the credit.  If a sublessor claims the credit, the lease payments they pay are reduced by the lease payments they receive to determine the amount eligible for the credit.

 

How to Claim

To claim the tax credit, the taxpayer must complete the High-Technology Investment Tax Credit Worksheet to calculate the amount of the credit.  This worksheet will help the taxpayer to determine the total tax credit available, and how much of that credit is currently available for use.  The total credit available becomes a modification to increase Maine taxable income and the amount available for the current year becomes a dollar-for-dollar reduction in Maine income tax.

There is no time frame specified in Maine’s tax code for when to claim the credit.  Therefore, a taxpayer who failed to claim the credit on his or her original Maine income tax return has up to three years from the date that they timely-filed their original return to amend it and claim a refund, or up to two years from the date that they paid their tax, which ever is later.  The time frame for claiming a refund on an amended return is discussed in a different blog post, and Maine follows the federal law for those time frames.

 

Limitations on the Credit

The Maine High Technology Investment Tax Credit is subject to certain limitations.  First, it cannot reduce Maine tax liability below zero.  Second, it cannot reduce a taxpayer’s liability to less than the taxpayer’s liability in the preceding year, after accounting for all other tax credits.  Finally, the Maine High Technology Tax Credit cannot reduce Maine tax liability by more than $100,000 in any one year.

Any amount of the tax credit that is available but cannot be claimed due to these limitations can be carried forward for up to five years.

 

Resources

High-Technology Investment Tax Credit Worksheet & Instructions

Maine statute related to the High-Technology Investment Tax Credit

Technology Tax Credit information from the Maine Department of Economic and Commercial Development

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