If upheld on June 8, tax reform would bring a fundamental change in the way Mainers determine their income tax obligation.
Instead of calculating tax on income after exemptions and deductions, filers would calculate taxes on their adjusted gross income and, in most cases, subtract a new household tax credit.
For all but the highest-earning taxpayers, the new credit comes in “standard” and “alternate” forms that replace the familiar standard or itemized deductions.
Filers claiming standard deductions would claim the standard credit: $700 for single filers, $1,050 for a head of household, and $1,200 for joint filers. Filers continue to get a $250 credit for each personal exemption.
Filers with significant itemized deductions — such as mortgage interest, property taxes, medical expenses or charitable donations — would take the alternate credit.
The alternate essentially allows a credit of 5.5 percent of total deductions plus a baseline deduction of $400 for single filers and $800 for joint filers. Allowable deductions would be the same as those in the current code, though caps would be imposed for the first time: $13,636 for individual filers and $27,273 for married couples.
The cap on deductions means the maximum alternate credit would be $1,150 for single filers and $2,300 for joint filers. Again, filers continue to get a $250 credit for each personal exemption.
“Those who will end up paying more income tax under the new system are those that have very high itemized deductions,” said Richard Woodbury, of Yarmouth, an economist and former legislator who served on the Taxation Committee and has extensively studied the current reforms.
Eighty percent of families and individual filers with incomes above $107,000 stand to pay lower income taxes, according to projections.
The credit would begin declining when income exceeds $27,500 for single filers, $41,250 for heads of households and $55,00 for couples filing jointly. The credit would be reduced by $15 for every $1,000 above those amounts.
The reduction means, for example, that a family of four claiming the maximum amount of itemized deductions and $1,000 in exemption would see their credit reduced to zero when its adjusted gross income hit $275,000.
A portion of the state’s earned income tax credit that mirrors a federal tax credit for low-income filers would also be refundable for the first time. Married couples who qualify for the earned income tax credit could receive up to an additional $80 back if they file a state tax return.
The earned income tax credit is a refundable income tax credit for low- and moderate-income workers.
Currently, the only refundable tax credit in the state is for child care. That credit would remain.
For low-income Mainers, the new household credit would also be partially refundable — up to $50 for single or head-of-household filers and $70 for married couples — to offset the increase in sales taxes.
About 171,000 people, or 13 percent of the state’s population are in families that do not file tax returns with the state, typically because they do not earn enough to pay taxes.
These people would not receive credits to counter the new sales tax burden if they do not file.
The tax reforms would only affect personal deductions, not business deductions.
The many sole proprietors in the state will still file their business costs on Schedule C when computing profits. Business partners in partnerships and S-corp owners would report their profit through Schedule E, allowing their costs to be claimed in the same way as now.
The far fewer number of C-corp corporations in the state file corporate income tax returns that would not be affected by the changes to the sales tax code.