For the 2023 tax year, Maryland has updated its rules regarding the state tax cap on federal returns and what to do for Maryland returns. Here’s the updated information compiled from the MarylandTaxes.com website:
Instructions for FORM 502 — itemized deduction calculation:
“Copy the amount from federal Form 1040, Schedule A, line 17, Total Itemized Deductions, on line 17a of Form 502. Certain items of federal itemized deductions are not eligible for State purposes and must be subtracted from line 17a. State and local income taxes used as a deduction for federal purposes must be entered on line 17b.”
New for 2023:
Maryland has passed legislation (Senate Bill 523) to allow a workaround for the federal SALT deduction cap. This allows pass-through entities (partnerships and S corporations) to elect to pay state income taxes at the entity level, which can be deducted on the federal return without limitation. The taxes paid by the entity are then passed through to the individual owners as a state tax credit.
This Means…
For individuals not eligible for the pass-through entity workaround, the instructions remain largely the same as before. Start with the maximum state and local taxes (SALT) as per your federal return. Treat as much of the $10,000 federal deduction as property tax up to the total amount of property taxes paid, and the rest of the federal deduction is the state income tax. This limits the Maryland addback because only the state income tax is “added back” — i.e. not deductible for Maryland.
Example:
If the state income tax withheld is $8,000 and the property tax paid is $4,000 for a total of $12,000 paid, the deduction for state and local taxes (SALT) for federal taxes is $10,000. The Maryland total deduction starts with the $10,000 allowed on the federal return. $4,000 of this is treated as the full amount of the real estate tax paid, and $6,000 is treated as the state income tax paid and is therefore not deductible on the Maryland return ($10,000 less $4,000). So, the $4,000 is the net Maryland itemized deduction for taxes.
Since the introduction of the $10,000 state and local tax (SALT) deduction cap as part of the Tax Cuts and Jobs Act (TCJA) in 2017, Maryland has made several changes to its Form 503 to address the treatment of relevant deductions. Here’s a summary of the changes:
1. 2018-2020: Maryland initially followed the federal SALT cap, limiting the deduction for state and local taxes to $10,000 on both federal and state returns. This resulted in a significant increase in tax liability for many Maryland residents who itemize deductions.
2. 2021: Maryland passed the RELIEF Act, which allowed residents to subtract the amount over the $10,000 SALT cap from their Maryland adjusted gross income. This provided some relief to taxpayers by allowing them to claim the full amount of their state and local taxes paid on their Maryland return, even if they were limited on their federal return.
3. 2022: Maryland continued to allow the subtraction of the amount over the $10,000 SALT cap from the Maryland adjusted gross income, providing ongoing relief to taxpayers.
4. 2023: Maryland passed Senate Bill 523, which introduced a workaround for the federal SALT deduction cap. This legislation allows pass-through entities (partnerships and S corporations) to elect to pay state income taxes at the entity level, which can be deducted on the federal return without limitation. The taxes paid by the entity are then passed through to the individual owners as a state tax credit. For individuals not eligible for this workaround, the treatment of SALT deductions remains largely the same as in previous years.
Throughout these changes, Maryland has required taxpayers to add back any state and local income taxes deducted on their federal return when calculating their Maryland itemized deductions. This ensures that taxpayers do not receive a double benefit for these taxes at the state level.
