AUGUSTA – As taxpayers put the finishing touches on their returns for 2005, they can look forward to some new state benefits for 2006 and 2007.
Several changes in the tax code were included in the state’s supplemental budget, which was approved last week by the governor and the Legislature. The new features could translate into millions of dollars in tax savings for thousands of families.
Two changes, originally scheduled to take effect in 2007, were accelerated to begin Jan. 1, 2006. Maine will match the federal deduction for student loan interest and allow taxpayers to claim 25 percent of the federal dependent care credit.
In 1997, the federal government created a deduction for the interest on student loans during the first five years of repayment, said Mike Allen, director of economic research for Maine Revenue Services. Maine, struggling through a recession, wasn’t able to keep up. Now, the state will catch up. The student loan interest deduction is expected to affect 12,000 people and cost the state about $515,000 in 2006.
Also included in the 2001 federal tax cuts was an increase in the dependent care credit, which includes child care costs. Maine had previously allowed for a credit of 25 percent of the federal amount, but had lowered that to 21.5 percent when the federal government became more generous. The budget restores the 25 percent figure beginning in the 2006 tax year, which means an estimated $540,000 for 30,000 families.
As part of the negotiations to win Republican support, the supplemental budget also includes a tax deduction for health savings accounts. According to Allen, the tax break is expected to affect between 600 and 750 returns and cost the state about $250,000.
“It’s a new program, even at the federal level,” Allen said. “2004 was the first year (health savings accounts) were available. The original estimate put the cost at about $600,000. Now that we’re getting some tax return data in, the estimated loss is about $250,000.”
Beginning in 2007, the first $250 in contributions per child to 529 college savings accounts can be made in pre-tax dollars for individuals with adjusted federal income of less than $100,000 and for joint filers with adjusted income of less than $200,000. The plans are similar to individual retirement accounts. All contributions – before this change – were made in after-tax dollars. The accounts grow tax free and no taxes are due if withdrawals are used for approved education-related expenses.
Each state offers its own version of the 529 plans, Allen said. Some states also include upfront incentives to entice its residents to invest in their particular plan. Maine’s deduction will be good for contributions made to any state’s 529 plan.
“The goal is to encourage people to save for college,” Allen said. “So it really shouldn’t matter which state plan they choose.”
The MRS estimates that 15,000 households will take advantage of the offer for about $500,000 in tax savings.
The property tax exemption for veterans was also expanded. Veterans who served between Aug. 24, 1982, and July 31, 1984, and between Dec. 20, 1989, and Jan. 31, 1990, are now eligible.