It’s that time of year when South Portland accountant Tom Gioia typically dives into Maine’s tax code to see what the powers that be have been up to since the last tax-filing season.
As he sharpens his pencils this time, Gioia’s shaking his head in disbelief.
“I’m not screaming that they did this knowingly,” said Gioia, referring to Gov. Paul LePage and the Maine Legislature. “I think they just had to come up with some mechanism and they threw this out there and said, ‘Oh that sounds good. Yeah, let’s go with that.’ ”
He’s talking about Maine’s new $27,500 cap on the deductions you can itemize on your 2013 state income tax return. It was passed by lawmakers and signed by the governor last year in an attempt to counterbalance Maine’s 2011 income-tax cut and help bring the state into alignment with various changes in the federal tax code.
Now let’s be clear here: For most Mainers, the chances of ever running up $27,500 in tax deductions falls somewhere between “Say what?” and a winning pick in today’s Powerball drawing.
But Gioia, a partner with the firm Otis Atwell, gets all kinds of clients – from the rich, to the not-so-rich, to the just-getting-by. So when he saw that the $27,500 cap was set to kick in this tax season, he asked himself a very simple question: What types of taxpayers are most likely to bump into this newly installed ceiling?
He found two: People who give away tons of money, and nursing home patients.
Let’s begin with the big-time charitable donors, bless them every one.
“Two taxpayers each have taxable income before deductions of $1 million,” proposed Gioia. “One donates nothing to charity and the other donates $250,000 annually.”
Got it – and hats off to that second guy!
Under Maine’s new top income tax rate of 7.95 percent, that first millionaire will save just over $3,300 from his bill under Maine’s previous top rate of 8.5 percent. Not exactly a windfall at that income level, but nevertheless another paving block on Easy Street.
And what about the millionaire whose charitable-donations deduction just shrank from $250,000 to a relatively paltry $27,500? His (or her) generosity will cost $13,651 more than last year.
“So in Maine, if you make $1 million and are not generous, you get a tax reduction,” concluded Gioia. “On the other hand, if you make $1 million and give back to the community, you get an enormous tax increase.”
Let’s file that, for now, under “Welcome to Maine, where no good deed goes unpunished.”
Next up, the nursing home crowd.
In the past, notes Gioia, many residents of skilled-nursing facilities around Maine have relied on their individual retirement accounts and other pre-tax savings to pay for the care they need in their twilight years. Such long-term care, which is not covered by Medicare, can easily cost as much as $100,000 a year in southern Maine.
The good news, at least until now, was that all of that $100,000 could be deducted as a medical expense – leaving the nursing home resident with no state tax liability to further erode his or her hard-earned nest egg.
No longer. This year, only $27,500 of that cost will be deductible, leaving the nursing home resident with $72,500 in taxable income and a state tax bill of just under $4,500.
“No one knows about it. Nobody,” warned Gioia. “All these old people are going to fall over dead when they get their tax return and it says ‘balance due’ from this arcane provision that no one has thought about.”
Maine Revenue Services is going after Grandma? Who knew?
“It’s news to me,” said state Sen. Anne Haskell, D-Portland, who co-chairs the Legislature’s Taxation Committee, in an interview on Tuesday.
To be fair, the cap on deductions never crossed the doorstep to Haskell’s committee when it sailed into Maine’s tax code back in June. Rather, it was proposed by the LePage administration and accepted by the Appropriations Committee (and subsequently a majority of both legislative chambers) as they hammered out a budget deal aimed primarily at bringing Maine into compliance with recent federal tax changes.
“Had there been an extensive public hearing, some of that stuff may have come out at that time,” noted Haskell. However, “as far as I know, (the Appropriations Committee) didn’t hear that kind of public testimony.”
Which brings us to L.D. 1664, a bill scheduled for a hearing Wednesday afternoon before Haskell’s Taxation Committee. It’s intent: exempt charitable donations, at least, from the cap on deductions.
Explained Sen. James Boyle, D-Gorham, the bill’s sponsor, “In a sense, we’ve cut the legs out from under a number of the nonprofits that rely on (donations) as a primary source of funding.”
Among those who plan to second that motion at the hearing is Brenda Peluso, director of policy and operations for the Maine Association of Nonprofits.
Using Maine Revenue Service data from the 2010 tax year, Peluso said Tuesday, 12,851 Mainers who exceeded $27,500 in itemized deductions claimed an average of $8,167 in charitable donations – money that could easily dry up if those kindhearted folks can no longer knock it off their taxable income.
Put more simply, Peluso said, her organization “conservatively estimates” that of the $433 million donated annually to Maine’s nonprofits (80 percent of which comes from individuals), $20 million will disappear because of the cap on deductions.
“Our point is that the deduction for charitable giving is unique. It’s the one provision that encourages taxpayers to give away a portion of their income to benefit others,” said Peluso. “This benefits the community as a whole.”
No argument there.
Still, with all due respect to the well-heeled-and-generous, what about Grandma (and Grandpa)? Is anyone going to bat for the 70- and 80-somethings who are trying to stretch their life savings to match their lifespans – without tossing in an out-of-nowhere tax bill?
Richard Erb, president and CEO of the Maine Health Care Association, said Tuesday that accountant Gioia’s alarm was the first he had heard of the looming tax liability for self-paying, skilled-nursing-care patients.
“It’s sort of insult to injury for people who have saved for their long-term-care needs,” noted Erb, whose organization represents Maine’s nursing homes.
Haskell agreed. When it comes to a deduction do-over, she promised, “I would think (Grandma) would be first on the list.”
Note to Grandma: Bring the guy with the sharp pencils.