If a new federal tax law cuts a high earner's itemized deductions, does Maryland cut that person's state itemized deductions too?

Plain-English summary

A 1990 federal law, part of that year's Omnibus Budget Reconciliation Act, added a new rule (Internal Revenue Code §68) cutting the itemized deductions available to certain high-income taxpayers by a percentage of their income over a set threshold. The Comptroller asked whether a Maryland taxpayer subject to this federal cut also had to use the smaller, reduced total when itemizing deductions on the Maryland state income tax return, or could still claim the larger, pre-cut total on the state form.

The opinion concluded that Maryland taxpayers must use the reduced total. Under §10-218 of the Tax-General Article, a Maryland itemizer's state deduction is defined as "the sum of the itemized [federal] deductions," and the opinion read that phrase as meaning whatever amount the taxpayer is actually allowed to deduct on the federal return, after all federal limitations, including the new §68 reduction, are applied. Because Maryland's income tax law has long been built to track the federal itemized-deduction figure rather than list its own separate set of deductions, the opinion found no basis to let a taxpayer claim a bigger deduction on the state return than federal law actually allows on the federal one.

Currency note

This opinion was issued in 1991 and interpreted §10-218 of the Tax-General Article and §68 of the Internal Revenue Code as they then existed. An editor's note attached to the original opinion states that the provision in question was substantively amended by Chapter 487 of the Laws of Maryland 1991 and Chapter 255 of the Laws of Maryland 1993. Subsequent statutory amendments, further Internal Revenue Code changes, court decisions, or later AG opinions may have changed the analysis further still. Treat this page as historical context, not current legal advice. Verify the current state of Maryland's itemized-deduction conformity rules and the federal itemized-deduction limitation rules before relying on any specific figure or rule described here.

Common questions

Does Maryland automatically follow federal rules when it comes to itemized deductions?
According to this 1991 opinion, yes, in the sense that the Tax-General Article defines the Maryland itemized deduction as the sum of a taxpayer's actual federal itemized deductions, so any federal limitation that shrinks that federal total also shrinks the deduction available on the Maryland return.

Why did the 1990 federal law matter for Maryland taxpayers specifically?
The opinion explained that Internal Revenue Code §68, added by 1990 federal legislation, required certain high-income taxpayers to reduce their total itemized deductions, and concluded that this same reduced total, not the pre-reduction total, controlled for Maryland tax purposes too.

Does it matter whether the federal cut applies to one specific deduction or to the whole itemized total?
No, according to the opinion. It concluded that it made no difference that §68 worked on the aggregate of a taxpayer's itemized deductions rather than any single discrete deduction, since Tax-General §10-218 refers to the sum of federal itemized deductions, whatever that sum turns out to be after federal law is applied.

Background and statutory framework

Under TG §10-218, an individual who itemizes on the federal return may elect to itemize on the Maryland return using "the sum of the itemized [federal] deductions" (reduced by state and local income taxes claimed), and TG §10-219(1) applies a parallel rule to nonresidents. The opinion traced this approach back to Maryland's original 1937 income tax statute, Chapter 11 of the Laws of Maryland 1937 (Special Session), §217, which listed specific permissible state deductions, and to the 1967 overhaul, Chapter 142 of the Laws of Maryland 1967, amending former Article 81, §281(a), which abandoned that separate list in favor of simply incorporating whatever itemized deductions a taxpayer used on the federal return. The opinion described this incorporation as reflecting Maryland's broader policy, reinforced by TG §10-107's instruction that the Comptroller apply federal administrative and judicial interpretations to state tax administration, of deliberate conformance between state and federal income tax law, quoting Katzenberg v. Comptroller's description of a "doctrine of conformance."

The opinion distinguished its conclusion from an earlier ruling, 66 Opinions of the Attorney General 242 (1981), which held that a federal provision letting non-itemizers deduct a percentage of charitable contributions had no Maryland effect, because Congress had excluded that direct charitable deduction from the definition of "itemized deductions" altogether; here, by contrast, §68 reduces deductions that remain itemized deductions in form but are capped in amount. The opinion reasoned that the phrase "otherwise allowable" in §68(a) means the deductions could be claimed in full but for §68's percentage reduction, so to the extent of that reduction they are not "allowable" under federal law and, following Comptroller v. Diebold, Inc.'s description of Maryland's tax law as "inextricably keyed" to federal law, may not be itemized on the Maryland return either. The opinion also cited B.C. Cook & Sons, Inc. v. Commissioner for the general principle that a taxpayer's ability to itemize a deduction depends entirely on the federal rules that define its availability, and noted that the Comptroller's office had consistently applied this same approach to earlier federal deduction limitations, such as percentage floors on medical and miscellaneous expense deductions.

Citations and references

Statutes:

• §68 of the Internal Revenue Code, 26 U.S.C. §68, the 1990 federal provision reducing itemized deductions for certain high-income taxpayers
• §68(b), setting the $100,000 "applicable amount" threshold for 1991, adjusted for inflation in later years
• §68(d), providing the reduction applies after any other limitation on an itemized deduction
• §68(c), excluding medical expenses, casualty and theft losses, and investment interest from the reduction
• §10-218 of the Tax-General Article, defining the Maryland itemized deduction as the sum of the taxpayer's federal itemized deductions
• TG §10-219(1), applying a parallel federal itemized-deduction rule to nonresident taxpayers
• Chapter 11, Laws of Maryland 1937 (Special Session), §217, Maryland's original income tax statute listing specific state deductions
• Chapter 142 of the Laws of Maryland 1967, the 1967 overhaul replacing the separate deduction list with federal itemized-deduction incorporation
• former Article 81, §281(a), the 1967-amended provision incorporating federal itemized deductions
• TG §10-107, instructing the Comptroller to apply federal administrative and judicial tax interpretations where practicable
• §68(a), the operative reduction provision applied to "otherwise allowable" itemized deductions
• Chapter 487 of the Laws of Maryland 1991, an editor's-note amendment to the provision discussed in this opinion
• Chapter 255 of the Laws of Maryland 1993, a further editor's-note amendment to the provision discussed in this opinion

Cases:

• Katzenberg v. Comptroller, 263 Md. 189, 198, 282 A.2d 465 (1971), Maryland Court of Appeals decision describing the legislature's doctrine of conformance between state and federal income tax law
• B.C. Cook & Sons, Inc. v. Commissioner, 584 F.2d 53, 54 (5th Cir. 1978), federal appellate decision on a taxpayer's dependence on federal rules to define an available deduction
• Comptroller v. Diebold, Inc., 279 Md. 401, 408, 369 A.2d 77 (1977), Maryland Court of Appeals decision describing Maryland's income tax law as inextricably keyed to federal income tax law

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1991/Volume76_1991.pdf (this opinion appears at printed pages 380-384 of the bound annual volume; Maryland's site does not publish a standalone PDF of this opinion)

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

TAXATION

Income Tax - Itemized Deductions For Maryland Income Tax
Purposes Reflect Overall Reduction Affecting Federal
Income Tax Deductions

January 31, 1991

The Honorable Louis L. Goldstein
Comptroller

   You have requested our opinion whether itemized deductions for

Maryland income tax purposes will be subject to a new overall reduction
affecting federal income tax deductions taken by some taxpayers.
Specifically, if a high-income individual taxpayer must reduce the total
of his or her itemized deductions under newly enacted §68 of the
Internal Revenue Code, 26 U.S.C. §68, you ask whether the taxpayer
must use the reduced total of itemized deductions when filing a
Maryland income tax return.

   For the reasons stated below, we conclude that under §10-218 of

the Tax-General Article ("TG" Article), the individual taxpayer's total
itemized deductions for State income tax purposes must reflect the
reduction required by federal law.1

                               I

             New Limits on Federal Deductions

   The Revenue Reconciliation Act of 1990, Title XI of the

Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), contained
a number of changes designed to increase federal tax revenues. One of
these changes requires certain high-income taxpayers to reduce the
amount of itemized deductions to which they would otherwise be
entitled.

   In pertinent part, §68 of the Internal Revenue Code provides as

follows:

        (a) In the case of an individual whose
   adjusted gross income exceeds the applicable
   amount, the amount of the itemized deductions
   otherwise allowable for the taxable year shall be
   reduced by the lesser of -

       (1) 3 percent of the excess of adjusted gross income
   over the applicable amount, or

       (2) 80 percent of the amount of the itemized deductions
   otherwise allowable for such taxable year.

The "applicable amount" is $100,000 for 1991, with an inflation
adjustment for future years. §68(b). This limitation is to be applied
"after the application of any other limitation on the allowance of any
itemized deduction." §68(d).2

   To take a greatly simplified example, suppose a taxpayer with an

adjusted gross income of $150,000 made $10,000 in charitable donations
and paid $10,000 in property taxes. Prior to OBRA 1990, the taxpayer
could have taken itemized deductions totaling $20,000. As a result of
OBRA 1990, however, the taxpayer may claim itemized deductions
totaling only $18,500, $20,000 minus $1,500, which is 3 percent of
$50,000, the difference between the taxpayer's $150,000 adjusted gross
income and the "applicable amount" of $100,000.

   To pursue this simplified example, the question you pose is

whether this taxpayer would be able to claim $20,000 in itemized
deductions for State income tax purposes or instead would be limited to
$18,500 in itemized State deductions, the total dollar amount of
deductions resulting from the new percentage reduction under federal
law.

                               II

          Itemized Deductions For State Income Tax

   Under TG §10-218, a taxpayer is required to use "the sum of the

itemized [federal] deductions" if the taxpayer chooses to itemize on the
State income tax return:

        Only an individual who itemizes deductions
   on the individual's federal income tax return
   may elect to itemize deductions on the
   individual's income tax return using the sum of
   the itemized deductions reduced by the amount
   claimed as taxes on income paid to a state or
   political subdivision of a state.

See also TG §10-219(1) (nonresident must adjust "federal itemized
deductions").

   When Maryland first enacted its income tax, the statute listed the

permissible State deductions. See Chapter 11, Laws of Maryland 1937
(Special Session), §217. In a major overhaul of the law in 1967,
however, the General Assembly decided to abandon a separate listing
and instead simply called for use of the same itemized deductions as the
taxpayer used on the federal return.3

   This incorporation of federal itemized deductions reflects the

overall policy of Maryland's income tax law: "[The] State Legislature
deliberately and intentionally pronounced a doctrine of conformance
between the State income tax law and the federal income tax law.'"
Katzenberg v. Comptroller, 263 Md. 189, 198, 282 A.2d 465 (1971)
(quoting 52 Opinions of the Attorney General 451, 452 (1967)). This
policy is reflected in TG §10-107, which instructs the Comptroller, to
the extent practicable, to "apply the administrative and judicial
interpretations of the federal income tax law to the administration of the
income tax laws of this State."

   In our view, the application of this principle leads to the

conclusion that "the sum of the itemized deductions" referred to in TG
§10-218 means the total of those deductions that a taxpayer actually may
take on his or her federal return, in other words, deductions subject to
whatever limitations or reductions are required by federal law. The term
"deduction" has no absolute meaning; a taxpayer's prerogative to
itemize deductions depends entirely upon the web of federal
requirements that define the availability of the deduction. Cf. B.C.
Cook & Sons, Inc. v. Commissioner, 584 F.2d 53, 54 (5th Cir. 1978).
Maryland law simply incorporates this federal structure.

   Our approach to this problem is consistent with the analysis in 66

Opinions of the Attorney General 242 (1981). In that opinion, the
Attorney General was asked about the effect on the Maryland income tax
law of a provision in the Internal Revenue Code that allowed persons
who did not itemize their deductions to reduce their adjusted gross
income by a percentage of charitable contributions. In concluding that
this "direct charitable deduction" had no effect on a taxpayer's
calculation of Maryland tax liability, the opinion pointed out that
Congress had expressly excluded the direct charitable deduction from the
definition of "itemized deductions." Because of this congressional
decision, the opinion reasoned, "Maryland taxpayers who elect to deduct
the sum of federal itemized deductions ... would derive no benefit from
the direct charitable deduction ...." 66 Opinions of the Attorney General
at 245. The application of what is now TG §10-218, in other words,
was viewed as dependent upon the availability of the deduction to a
federal itemizer. The opinion concluded: "That a Maryland tax
consequence should be entirely dependent on the way in which Congress
amended the Internal Revenue Code is wholly consistent with the
approach adopted by the General Assembly in enacting the Maryland
income tax law." 66 Opinions of the Attorney General at 247.

   The administrative practice of the Comptroller's Office reflects

this view of the law. Each time that a change in the Internal Revenue
Code resulted in limitations on certain taxpayers' ability to claim an item
of expense as a deduction, the Comptroller's office viewed the reduced
federal deduction as the only permissible item for Maryland income tax
purposes. Thus, for example, when Congress provided that medical
deductions could be claimed only when they exceeded certain
percentages of adjusted gross income, Maryland taxpayers became
subject to that same restriction.4 Likewise, when certain miscellaneous
expenses could be itemized on the federal return only if they exceeded
two percent of adjusted gross income, Maryland itemizers became
subject to the same limitation.5 The same is true of restrictions on the
deduction of certain casualty losses and most kinds of interest.

   To be sure, §68(a) reduces "otherwise allowable" itemized

deductions, and the problem is thus different from that addressed in the
1981 opinion, where the expense in question was not treated under
federal law as an itemized deduction at all. Nevertheless, the phrase
"otherwise allowable" simply means that, were it not for §68, these
deductions could be itemized to the fullest extent otherwise permitted.
But §68 reduces the total of these deductions; hence, to the extent of the
reduction these deductions are not "allowable" under federal law and
therefore may not be itemized under State law.

   In our view, then, it makes no difference that §68 works on the

aggregate of itemized deductions, instead of discrete ones. TG §10-218
refers to "the sum of the [federal] itemized deductions." For certain
taxpayers, §68 of the Internal Revenue Code will cause that "sum" to be
less than it would otherwise be.

   This State's income tax law is "inextricably keyed" to the federal

income tax law. Comptroller v. Diebold, Inc., 279 Md. 401, 408, 369
A.2d 77 (1977). In TG §10-218, the General Assembly intended to key
Maryland itemized deductions to federal itemized deductions. If a
deduction cannot be claimed on the federal return, it may not be claimed
on the Maryland return either, whether a particular expense is simply
not available as a deduction at all or whether less than the entirety of an
otherwise allowable deduction may be claimed by a particular taxpayer.

                              III

                          Conclusion

   In summary, it is our opinion that if an individual taxpayer

itemizes deductions on the Maryland income tax return, and if the
taxpayer is required by §68 of the Internal Revenue Code to reduce total
federal deductions, the taxpayer must make a corresponding reduction
in total State deductions.

                                       J. Joseph Curran, Jr.
                                       Attorney General

                                       Jack Schwartz
                                       Chief Counsel
                                         Opinions and Advice

Editor's Note:

   The provision in question was substantively amended by Chapter

487 of the Laws of Maryland 1991 and Chapter 255 of the Laws of
Maryland 1993.

1
This conclusion does not affect returns for the 1990 tax year. The
federal reduction, and therefore its impact on State deductions, applies in 1991
and thereafter.

2
The deduction does not apply to medical expenses, casualty and theft
losses, and investment interest. §68(c). Allowable itemized deductions are
generally set out in Parts VI and VII of the Internal Revenue Code.

3
As amended by Chapter 142 of the Laws of Maryland 1967, former
Article 81, §281(a) read as follows: "If a resident individual has itemized his
deductions from adjusted gross income in determining his federal income tax, he
may elect in determining his taxable income under this article to deduct the sum
of such itemized deductions ...," with certain exceptions.

4
The "floor" for the deductability of these expenses was first set at 3%
in 1965, increased to 5% in 1982, and set at its present level of 7.5% in 1986.

5
This 2% "floor" was added by the Tax Reform Act of 1986.