Maine Tax Form 1040ME Schedule 1 & 2 - Income Modifications & Itemized Deductions Instructions

INSTRUCTIONS FOR SCHEDULE 1 - INCOME MODIFICATIONS

Line 1. ADDITIONS to federal adjusted gross income. Also include the taxpayer’s distributive share of addition modification items from partnerships and S corporations.

Line 1a. Income from municipal and state bonds, other than Maine. Enter the income from municipal and state bonds, other than Maine, that is not included in your federal adjusted gross income. For example, enter interest from City of New York bonds on this line. However, do not enter interest from Portland, Maine bonds.

Line 1b. Net Operating Loss Recovery Adjustment. Enter on this line any amount of federal net operating loss carry forward that has been previously used to offset Maine addition modifications. For more information and examples, go to the MRS web site at www.maine.gov/revenue/forms (select Income Tax Guidance Documents).

Line 1c. Maine Public Employees Retirement System Contributions. Enter the amount of your 2008 Maine Public Employees Retirement System contributions on this line. To calculate this amount, subtract your federal wages from your state wages appearing on your 2008 State of Maine W-2 form. These contributions are tax deferred for federal tax, but are subject to Maine income tax.

Line 1d. Domestic Production Activities Deduction Add-back. Enter the amount claimed as a domestic production activities deduction on federal Form 1040, line 35.

Line 1e. Bonus Depreciation/Section 179 Expense Add-back. Federal adjusted gross income must be increased by the net increase in depreciation applicable to the 50% bonus depreciation claimed for federal tax purposes under section 103 of the Economic Stimulus Act of 2008 and section 179 expense due to federal law changes enacted during and since 2003. The amount of this modification is determined by fi rst recalculating the depreciation and/or section 179 expense on federal Form 4562 exclusive of all 50% bonus depreciation and/or section 179 expense increases. Enter on line 1e the difference between this recalculated Form 4562 amount and the original Form 4562 amount claimed for federal income tax purposes. If the difference is less than zero, enter zero. Enclose both the actual and pro forma versions of federal Form 4562 with the Maine return. Property expensed under the provisions of section 179 at the federal level cannot be capitalized for Maine purposes. For more information and examples, go to the MRS web site at www.maine.gov/revenue/forms (select Income Tax Guidance Documents).

Line 1f. Fiduciary Adjustment - additions only. If applicable, enter your share of a fi duciary adjustment relating to income from an estate or trust (36 M.R.S.A. § 5122(3)). You must attach a copy of your federal Schedule K-1 to verify your share of income.

Line 1g. Other. Enter on this line:

• the amount of loss, deductions and other expenses of a fi nancial institution subject to Maine franchise tax that are included in your federal adjusted gross income due to an ownership share in the financial institution that is a partnership, S corporation, or entity disregarded as separate from its owner
• amounts deducted as a business or other expense for federal tax purposes that are included in the credit base for the high-technology investment tax credit and the forest management planning credit
• qualified tuition and other education expenses deducted on federal Form 1040 or Form 1040A
• qualified payments and tax benefits from states or municipalities to fi refi ghters and emergency medical responders that are excluded from federal gross income pursuant to Code Section 139B.

List the source of each amount claimed in the space provided. Attach supporting documentation when claiming an amount on this line.

Line 2. SUBTRACTIONS from federal adjusted gross income. NOTE: You may only subtract the items listed below on this schedule. Also include the taxpayer’s distributive share of subtraction modification items from partnerships and S corporations. If you are a part-year resident, nonresident or a “Safe Harbor” resident and have non-Maine-source income, see Schedule NR or NRH included in the nonresident long form booklet. If you are a resident of Maine and have income taxed by another state, see Schedule 3 on page 22.

Line 2a. U.S. Government Bond Interest. Enter your income from direct obligations of the United States Government, such as Series EE and Series HH Savings bonds and U.S. Treasury bills and notes. Include on this line only the amount of interest included in your federal adjusted gross income. You must include supporting documentation if the amount deducted exceeds $25,000.

Line 2b. State Income Tax Refund (Only if included in federal income). If you include a state or local income tax refund on line 10 of federal Form 1040, enter the amount on this line.

Line 2c. Social Security and Railroad Retirement Benefits included in federal adjusted gross income. Social Security benefits issued by the U.S. Government and Railroad Retirement benefits (Tier 1 and Tier 2) issued by the U.S. Railroad Retirement Board are not taxed by the State of Maine. Also, unemployment and sick benefits issued by the Railroad Retirement Board are not taxable to Maine. However, benefits issued by the Canadian Railroad Retirement Board are taxable as Maine income.

Line 2d. Pension Income Deduction. Enter the amount from line 8 of the Worksheet on page 20. You must include copies of your 1099 forms to verify the deduction claimed.

Line 2e. Interest from Maine Municipal General Obligation & Private Activity Bonds and bonds issued by a Maine Airport Authority to the extent included in federal adjusted gross income. You may have this type of interest included in your federal adjusted gross income. Interest from these bonds is exempt from state income tax, even if taxed on the federal return. If you have interest of this type included in your federal adjusted gross income, enter the amount on this line. You must include supporting documentation if the amount deducted exceeds $25,000.

Line 2f. Premiums for Long-Term Care Insurance. Enter on this line premiums paid for long-term care insurance. To qualify, the insurance policy on which the premiums are paid 1) must meet the federal defi nition for a long-term care insurance contract (IRC § 7702B(b)) (these are long-term care premiums that generally qualify for federal itemized deductions), or 2) must be certified by the Maine Bureau of Insurance. Premiums claimed must be reduced by any premiums claimed as Maine itemized deductions and by any premiums included in the federal self-employed health insurance deduction claimed on federal Form 1040, line 29.

Line 2g. Maine Public Employees Retirement System Pick-Up Contributions. Enter contributions paid to you in 2008 that have been previously taxed by the state. Use this line only if you retired after 1988 and are receiving retirement benefits from the Maine Public Employees Retirement System (PERS). To calculate the amount for this line, subtract the state taxable gross amount from the federal taxable gross amount shown on the check stub of your last pension check received from Maine PERS in 2008 (if you have a Form 1099-R issued by the Maine Public Employees Retirement System, subtract the amount in box 12 from the amount in box 2a). Also enter on this line Maine PERS rollover amounts previously taxed by the state, whether or not included in federal adjusted gross income.

Line 2h. Qualified Tuition Program Contributions. Enter on this line up to $250, per beneficiary, of contributions made to a Maine or non-Maine qualified state tuition program (“529 college savings plan”). Limited to taxpayers with federal adjusted gross income not more than $100,000 whose filing status is single or married filing separately or $200,000 if married filing joint or head of household.

Line 2i. Fiduciary Adjustment - subtractions only. If applicable, enter your share of a fiduciary adjustment relating to income from an estate or trust (36 M.R.S.A. § 5122(3)). You must attach a copy of your federal Schedule K-1 to verify your share of income.

Line 2j. Bonus Depreciation/Section 179 Expense Recapture. Amounts required to be added to income under 36 M.R.S.A. § 5122(1)(N) (36 M.R.S.A. § 5200-A(1)(N) with respect to individual owners of certain electing S corporations) may be recaptured over the life of the applicable asset. For property placed in service in 2002, addition modifications may be recaptured in equal amounts over the remaining life of the asset beginning in 2004. For assets placed in service in 2003 through 2007, 5% of the addition modification is recaptured in the tax year immediately following the year the asset was placed in service, with the remaining 95% recovered in subsequent tax years, in equal installments, over the remaining life of the applicable asset. For more information and examples, visit www.maine.gov/revenue/forms and select Income Tax Guidance Documents.

Line 2k. Other Deductions. Unless specifically stated, do not enter non- Maine income on this line. Enter ONLY items specifically listed. List the source of each amount claimed in the space provided and attach supporting documentation when claiming an amount on this line. Except for net operating losses carried forward from previous tax years pursuant to 36 M.R.S.A. § 5122, enter only amounts included in federal adjusted gross income. Enter on this line:

• military compensation received by a nonresident servicemember
• the amount of the reduction in your salaries and wages expense deduction directly related to claiming the federal Work Opportunity Credit or Empowerment Zone Credit. These amounts are reported on federal Form 5884, line 2b or federal Form 8844, line 2b (owners of pass-through entities, enter your share of the amount from line 3 of these forms to the extent not included on line 2b). Note: do not enter wage amounts from Form 8844 related to the federal Renewal Community credit
• settlement payments received by Holocaust victims that are included in federal adjusted gross income
• account proceeds from a Family Development Account administered by FAME
• net operating losses carried forward from previous tax years pursuant to 36 M.R.S.A. § 5122(2)(H) or § 5122(2)(P) or, for individual owners of certain electing S corporations, net operating losses carried forward from previous tax years pursuant to § 5200-A(2)(H) & § 5200-A(2)(L)
• earnings from fi shing operations contributed to a capital construction fund
• the amount of military retirement benefits not included in the pension income deduction on line 2d received by certain licensed dentists who practice an average of 20 hours or more per week in Maine and accept patients who receive MaineCare benefits
• income from investments in the Northern Maine Transmission Corporation
• up to $750 of property tax benefits provided by municipalities to senior citizens pursuant to 36 M.R.S.A.§ 6232(1-A) to the extent included in federal adjusted gross income
• interest income and capital gains from the sale of bonds issued relative to the Maine Waste Management & Recycling Program to the extent included in federal
  adjusted gross income
• all items of income, gain, interest, dividends, royalties and other items of income of a financial institution subject to the Maine franchise tax that are included in your federal adjusted gross income due to an ownership share in the fi nancial institution that is a partnership, S corporation, or entity disregarded as separate from its owner
• the total of capital gains and ordinary income resulting from depreciation recapture pursuant to Code sections 1245 and 1250 realized on the sale of multifamily affordable housing property certified by the Maine State Housing Authority. A copy of the MSHA certificate must be attached to the return.

INSTRUCTIONS FOR SCHEDULE 2 - ITEMIZED DEDUCTIONS

Line 4. Total Itemized Deductions. Federal Form 1040. Enter your total itemized deductions as shown on federal Schedule A, line 29.

 Line 5a. Income Taxes Imposed by this State or any other taxing Jurisdiction or General Sales Taxes or Mortgage Insurance Premiums included in Line 4. Enter the total of state and local income taxes or sales taxes and mortgage insurance premiums included in line 4. Note: If line 14, Form 1040ME, exceeds $159,950 ($79,975 if married filing separate), complete the worksheet on page 20 to calculate the amount for line 5a.

Line 5b. Deductible costs, included in Line 4, incurred in the production of Maine exempt income. Enter any interest or other expense items attributable
to income not taxable under Maine law.

Line 6. Deductible costs of producing income exempt from federal income tax but taxable by Maine. Enter any interest or other expense items attributable to income taxable under Maine law, but exempt from federal income tax. Enter only amounts not included on line 4.