Taxes in Maryland
Maryland taxes have both a State and County component, with blended rates of 4.75% and 3% respectively for most residents, Maryland income tax rates are comparable to that of the Washington, D.C. Maryland income taxes are generally straight forward, though there are some adjustments to help reduce taxes. For business owners, Maryland does allow pass-through taxation for S Corporations, unlike the District. Like its neighbors, Maryland has an aggressive Collections Division and there are a few things you should know if you owe a balance on your return.
Starting with the federal adjusted gross income (AGI), Maryland makes certain adjustments to arrive at your state AGI. Some notable deductions include pension income and childcare expenses. You may itemize your deductions if you itemized your deductions for Federal. Maryland taxes can become complicated when spouses who live in different jurisdictions file separately and must allocate deductions.
Domicile vs. Residency:
You are domiciled in Maryland if this is your permanent legal residence meaning this is the place you intend to be, even if you do not live here currently. Domicile indicators include drivers’ license, voting, car registration, real property ownership, business pursuits and social ties. You may also be a Resident of Maryland if you maintain a place of abode here and spend more than 183 days in Maryland, even though you are domiciled somewhere else (special rules exist for Military service members and their spouses). You may be considered a part-year resident if you either moved into or out of Maryland and were domiciled subsequently or previously elsewhere, the significance being that part year residents pay MD taxes during their allotted time here, while those domiciled are taxed for the full year, subject to credit for state taxes paid elsewhere. If you are not required to file a tax return but had MD taxes withheld, you are required to file a tax return to seek a refund.
Credit for Taxes Paid to Other States:
Maryland residents are taxed on all income earned from all sources, regardless of location. If you have received income from another state and are required to pay taxes there, you may be eligible for a credit to avoid double taxation. For example, if you are working in New York you may be able to claim a credit for NY taxes paid on your MD resident return. Many taxpayers forget to claim this credit, resulting in an overpayment of their tax. Do not claim a credit for taxes paid to the District, instead seek a refund, as DC does not tax non-residents unless you are operating a business or rental activity and paying the franchise tax.
Maryland Tax Notices:
Maryland estimated tax payments are required if you do not have sufficient tax withheld and you will owe more than $500. The extension is for filing the return, not for payment of the tax and you must pay at least 90% of your tax by the due date of April 15th. If you file your return late you may owe up to 25% penalty of the balance due with the return. If you do not pay the tax in full when you file your return, interest will be charged at 10.5%.
As stated above, the financial consequences for not handling your income taxes correctly in Maryland can be severe. Accordingly, if you receive a tax notice from Maryland you should act immediately as delays will likely add to your debt. The first thing you will want to do is review the tax bill for accuracy by comparing it to your tax return. If the tax amount matches, then look for additional charges which may include penalty and interest to see how those were calculated. You have three main options upon reviewing your tax notice: pay in full; set up a payment plan; or take actions to dispute the charges. It is important to act within 30 days, otherwise Maryland may take enforcement actions including filing a tax lien, garnish your wages, levying your assets, preventing you from renewing your licenses and even publishing your name on their website.
Once tax has been assessed it is presumed correct and you have 30 days to request an Appeal which can be done easily online. If your plea is unsuccessful at the informal hearing you may appeal to the MD Tax Court. If mitigating circumstances kept you from filing your tax return or paying your tax timely, you may seek penalty forgiveness. Situations giving rise to penalty abatement are rare and specific, however the processes could be worth a shot. While the Maryland Comptroller is aggressive in collection activity, the agency acts reasonably in evaluating forgiveness. The strongest indicator of extenuating factors includes illness or death of the taxpayer or tax preparer; or may involve destruction or theft of records. There can be many other unusual situations that reasonably kept you from filing or paying taxes. The key is drafting a detailed explanation of the circumstances that prevented timely filing and/or payment. Offering copies of supporting documentation, such as medical records, death certificates, divorce records, news reports, weather reports, police reports, witness accounts, etc. is critical for a successful resolution. Offer any support to show that your request was not caused by the negligence or error, including emphasizing your good filing history.
Maryland Business Taxes:
Generally, every corporation organized under the laws of Maryland, every foreign corporation registered with the State Corporation Commission, and every corporation having income from Maryland sources, must file a corporation income tax return. One of the biggest distinctions in operating a business as a S Corporation is that Maryland recognizes the flow through of income, deductions, losses and credits to the individual owner, unlike the District of Columbia which requires registering and payment of the corporate franchise tax. As an S Corporation, an entity with a legal existence separate from its owners, the business does not pay any income tax but passes its income and expenses through to its shareholders to be included on their separate income tax returns. The corporation may still be responsible for sales and non-resident withholding taxes and advance registration is required with the Maryland Comptroller.