State Withholding Tax Changes for 2008

In the 2007 Special Session, the Maryland General Assembly enacted the Tax Reform Act of 2007 which resulted in major changes in the income tax law that go into effect January 1, 2008.

Change in Tax Rates and Rate Brackets: The General Assembly has amended Section 10-105(a) to alter the Maryland income tax rates and rate brackets for individuals for all tax years beginning after December 31, 2007. The new rates and rate brackets are indicated below:

Change in Exemption Amounts: The statute was amended to change the personal exemption amount.  For taxpayers with a federal adjusted gross income of up to $100,000 (up to $150,000 if filing jointly), the exemption amount has been increased from $2,400 to $3,200. An additional exemption of $3,200 may be claimed for each dependent who is at least 65 years of age on the last day of the tax year.

For taxpayers with higher incomes, the exemption amount is limited as follows:

The additional exemption for a taxpayer and spouse being at least 65 years of age or blind remains at $1,000.

Change in Refundable Earned Income Credit Rate and Eligibility: The statute was amended to increase the percentage of the federal earned income credit used to determine the amount that individuals may claim as a refundable earned income credit on the Maryland return. An individual may claim a refund in the amount, if any, by which 25 percent of the federal earned income credit exceeds the state income tax for the tax year.  Previously, the percentage rate was 20 percent. The eligibility for this refundable credit has been changed by removing the requirement that the taxpayer must have one or more dependent exemptions.

Safe Harbor for Calculation of Underpayment of Estimated Taxes: The statute was amended to mandate that the estimated tax payments made by individuals for tax year 2008 must be at least 90 percent of the tax developed for the current tax year or 120 percent of the tax developed for the prior tax year. Estimated tax payments for a corporation for tax year 2008 must total 90 percent of the tax developed for the current tax year or 130 percent of the tax developed for the prior tax year.

Pass-Through Entity Nonresident Tax Rates: For tax years beginning after December 31, 2007, the tax rates will be 6.75 percent for nonresident individual members (including nonresident fiduciaries) and 8.25 percent for nonresident entity members. These same rates will apply to the sale or transfer of real property or tangible personal property by a nonresident individual or nonresident entity.

Nonresident Income Tax: The statute was amended to change the calculation of the state income tax on nonresident returns. The state income tax imposed on a nonresident is calculated using the following formula: