HOW TO SAVE ON MAINE TAXES
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REVISED AND UPDATED AS OF DECEMBER 12, 2019
Maine is the Third Worst State in the Country When it Comes to Taxes
According to an April 2, 2019 article by the personal finance website Wallethub, Maine was ranked number 48 in the entire country on the subject of overall tax burden. New York was the worst state and Alaska was the best. Overall tax burden includes the cost of property taxes, individual income taxes and sales/excise taxes. As of 2018 Wallethub estimated Maine's total tax burden at 10.84%. Thus, the subject of how to save on Maine taxes is important.
Don't Get Distracted by Formal Tax Rates
Many people get distracted by formal tax rates. Politicians love to point to published tax rates and make (usually false) claims that they have cut taxes. The truth is different. The actual tax you pay to the government is the product of two numbers: the tax rate multiplied by taxable income.
The tax rate could indeed be cut by a new tax law, but if the definition of taxable income is expanded then the net result could be the same or even a disguised tax hike. It's easy for people to look up tax rates. It is far more difficult to understand the very complex definitions of taxable income.
Taxed to Death (Literally)
Here in Maine, and in many other states, there are actually four layers of taxation. Here is a simplified illustration:
Assume you own and operate a landscaping business. One day you realize your business needs a new backhoe. This backhoe is a piece of equipment your business must have in order to function, survive, and help you make a living from honest work. But before you buy the backhoe you must first earn the income to pay for it. Here in Maine income taxes (for 2018) range from 5.8% to 7.15%.
Then, when you buy the backhoe for your business you will be charged a 5.5% general sales tax.
And then, when you start using the backhoe your town or city may charge you personal property tax at the prevailing mill rate. Personal property taxes are levied on non-exempt business equipment including tools, office furniture, etc.
Finally, when you pass away your estate may owe a death tax on assets that exceed the exemption amount ($5.6 million for 2018). Maine's estate tax ranges from 8% to 12%.
Ways to Save on Maine Taxes
Here is a list of ten ways to save on a variety of Maine taxes:
(1) Pension Income Deduction - Maine allows a deduction of up to $10,000 for individuals receiving qualifying pension income. Any social security benefits received will reduce this $10,000 deduction. Military retirement pay is completely deductible. See Maine Schedule 1, Line 2d.
(2) MPERS Deduction - Anyone receiving pension income from the Maine Public Employees Retirement System may qualify for a special deduction equal to the difference between federal taxable pension income versus Maine taxable pension income. When Maine public sector workers contribute to the MPERS system while working the contribution is taxed. And then when these workers retire their Maine taxable pension is less than the federal amount. See the worksheet for the pension income deduction included in Maine's Individual Income Tax Booklet.
(3) Sales Tax Exemption for Farmers, Fishermen and Lumbermen - Maine Sales Tax Bulletin No. 13 explains that these business activities are exempt from sales tax on electricity and fuel. If a common meter is used for a building that is partly utilized for farming, fishing or lumber operations then you must file for a sales tax refund with Maine.
(4) No Sales Tax on Improvements to Real Estate - One complex area of sales tax law concerns construction projects such as installing a generator, deck, pool, fencing, etc. These types of projects are usually considered permanent attachments to real estate and are generally treated as exempt from sales tax by the end-user. See Maine Sales Tax Bulletin No. 4.
(5) Homestead Exemption - Effective April 1, 2020 Maine's Homestead Exemption for a personal residence will increase to $25,000 from $20,000. You must proactively apply for a homestead exemption at your town or city of residence.
(6) Maine Opportunity Income Tax Credit - If you graduated from college and work in Maine you may qualify for the Opportunity Credit, which is based on student loan payments and the type of college degree you have. This is one of the most generous tax credits offered by Maine.
(7) Are You Really a Maine Resident? - There is a non-resident tax credit calculated on Schedule NR and Worksheet B which determines what income is legally taxable by Maine. Whether you are a Maine resident or not, and how much of your federal taxable income should be taxed by Maine are questions of fact. See the instructions to Schedule NR and also related Worksheet A.
(8) Mixed Use of Heating Oil - One error I've seen too many times occurs when a landlord has mixed use property, such as a building where the ground floor is a business and the 2nd floor is an apartment. This building might have one furnace and one oil tank. Pursuant to Maine sales tax law, heating oil used for residential purposes is exempt from tax. So in this simplified example it could be the case that half the cost of heating oil would be exempt from tax.
(9) How to Beat the Car Tax - Most Mainer's hate the car tax. Public transportation is rare in Maine. There are two ways to cut this tax: (1) Buy a vehicle that is six years old or older. This will minimize the excise tax; and (2) religious, charitable and certain other groups may qualify for a complete exemption from the car tax for qualifying vehicles.
(10) The Business Equipment Tax Exemption ("BETE") program - Beat the tax with BETE! This exemption was designed to encourage capital investment in Maine by providing for targeted tax relief of property taxes that otherwise would be due.
Certified Public Accountant Master of Business Administration
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