Insights & News

July 2015
Tax Planning

The State of Maryland Loses Double Taxation Case in the U.S. Supreme Court



By: Mark Stinson, Senior Advisor

 

Early and Happy Retiree are pleased as punch. They just returned from Ocean City, MD and their annual Memorial Day family vacation with their children, grandchildren, spouses of children, significant others of children, friends of grandchildren, and friends of the family.  What started out as a family vacation 30 years ago has turned into an annual vacation/reunion/retreat/event involving spreadsheet logistics on airfares, rental cars, and reservations. What was dubbed the Retiree Reunion is now shortened to The R&R. 

 

Early and Happy are also happy because Early’s sister, Hope, will get an unexpected state income tax refund from Maryland. On May 18, the Supreme Court of the U.S. determined, in Comptroller of the Treasury of Maryland versus Wynne, that the State of Maryland can no longer “double” tax residents that work outside of Maryland. Hope explained to Early that she lives in Columbia, Maryland and her business is located in Virginia, but she is paying state tax to Maryland and Virginia. 

 

Early is an engineer with a natural curiosity said,  “Hold on dear sister, thinking of you as I always do, I just happened to check Turbotax and Maryland residents get a credit for taxes paid to other states.”

 

Hope, a business owner, who relishes a friendly competition said, “My dear brother, Mr. Retiree, you are partially right.  My accountant told me that currently I get a credit for the State of Maryland income tax, but not the local, county (piggyback) tax.”

 

Hope is subject to the highest Maryland State income tax rate of 5.75% and as a resident of Howard County, the county tax rate of 3.2%. Therefore, Maryland gave her credit for 5.75% of the income earned out of state, but not 3.2%.  Therefore, her Virginia income was taxed by Virginia and Maryland (through the county tax).

 

The Supreme Court ruled this is double taxation and violates interstate commerce because it favors intrastate commerce over interstate. In other words, Maryland residents who work in Virginia are discriminated against because they pay more income tax than Maryland residents that work in Maryland. 

 

It is estimated that this ruling affects 55,000 Marylanders and will cost the state of Maryland $40 million of tax revenue annually. 

 

Maryland could issue refunds in excess of $200 million. Refunds will come from the Maryland income tax reserve fund.  In order to replenish the fund, the state of Maryland will reduce state income tax revenue sent to counties each quarter over a period of two years, starting in June 2016. 

 

This ruling applies to all Maryland residents that pay income tax out of state. This includes wage and business income (active income) and “passive” income such as an inheritance income, trust income, estate income, passive partnerships, etc.

 

Hope was not happy to point out to Early that the refund is not automatic. “I must file a forms 502X, 502CR, and 502LC for each year to claim a refund. Since I have not filed my 2014 return, I must file forms 502, 502CR, and 502LC .

 

Amended returns must be filed within three years from the time a return was filed or two years from the time the tax was paid, whichever is later. 

 

Residents that tried to claim the credit income tax returns between 2006 and 2014 will likely to be eligible for refunds. 

 

If you have questions, please contact Mark Stinson at mstinson@investfai.com or your tax advisor.  


 


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