For an update about the state tax cap in federal returns and what to do for Maryland returns, check out the information compiled below:
Directly from the MarylandTaxes.com website, here are 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.”
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.
If the state income tax withheld is $7,600 and the property tax paid is $3,800 for a total of 11,400 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. $3,800 of this is treated as the full amount of the real estate tax paid, and $6,200 is treated as the state income tax paid and is therefore not deductible on the Maryland return ($10,000 less $3,800). So, the $3,800 is the net Maryland itemized deduction for taxes.
Tax preparers are going to have to look at each and every itemized return for Maryland, which was a non-review item in years past for those using tax software. Most tax software should have this adjusted at this point, but the need to verify this is high priority!