Does Maryland Tax Retirement Income?

Does Maryland Tax Retirement Income?

The short answer is: it depends on the type of retirement income. Maryland does tax some forms of retirement income, but also offers various exemptions and exclusions. In this comprehensive guide, we’ll break down how different types of retirement income are taxed in Maryland and provide insights to help you plan your retirement finances effectively.

Overview of Maryland’s Taxation System

To understand how retirement income is taxed in Maryland, it’s crucial to have an overview of the state’s tax structure:

• Income Tax: Maryland uses a progressive tax system. State tax rates range from 2% to 5.75%, depending on income level.
• Local Tax: Each county and Baltimore City charge an additional local tax, ranging from 2.25% to 3.20% of taxable income.
• Other Taxes: Maryland also imposes sales, property, estate, and inheritance taxes.

Taxation of Specific Retirement Income Sources

Social Security Benefits

Good news for retirees: Maryland does not tax Social Security benefits. You can subtract all your Social Security income on your Maryland tax return.

Pensions

Pensions are generally subject to state taxes in Maryland. However, the state offers a pension exclusion (more on this later) that can significantly reduce the taxable amount for eligible retirees.

All military retirees can subtract up to $5,000 of their military pension from their taxable income, and those 55 and older retirees can subtract up to $15,000.

401(k) Plans and IRAs

• 401(k) and 403(b) Plans: Withdrawals are taxable but may be eligible for the pension exclusion.
• Traditional IRAs: Withdrawals are taxable and not eligible for the pension exclusion.
• Roth IRAs: Qualified withdrawals are typically tax-free.

Other Income Sources

Other retirement income sources, such as annuities, rental income, and investment income, are generally subject to Maryland state tax. Some annuity payments may be eligible for the pension exclusion. However, Non-Qualified Annuity distributions are not eligible for the pension exclusion.

Maryland’s Pension Exclusion

Maryland offers a significant tax break through its pension exclusion for those 65 and older:

• 2023 Exclusion Amount: $36,200
• 2024 Exclusion Amount: $39,500

However, this exclusion considers Social Security benefits and can be reduced or eliminated based on your total income.

Example: Let’s say you’re 65 and receive $20,000 in Social Security benefits and $30,000 from a pension in 2024.

Line	Description	Amount
1	Net taxable pension and retirement annuity included in your federal AGI	$30,000
2	Maximum allowable exclusion	$39,500
3	Total Social Security benefits	$20,000
4	Tentative Pension exclusion (Subtract line 3 from line 2.) (If less than 0, enter 0)	$19,500
5	Exclusion (smaller of line 1 or 4)	$19,500

1. Your Social Security benefits are not taxed.
2. From your $30,000 pension, you can exclude $19,500 ($39,500 – $20,000).
3. The remaining $10,500 of your pension would be subject to Maryland income tax.
4. Please note line 5: The tentative pension exclusion is the lessor of lines 1 and 4.

Estate and Inheritance Taxes

Maryland is one of the few states that impose both estate and inheritance taxes:

• Estate Tax: Applies to estates valued over $5 million (as of 2024), with rates up to 16%.
• Inheritance Tax: A flat 10% rate, but immediate family members are typically exempt.

Is Maryland Tax-Friendly for Retirees?

Maryland’s tax-friendliness for retirees is mixed:

Tax Planning Strategies for Maryland Retirees

To optimize your retirement finances in Maryland, consider these strategies:

1. Time your retirement account withdrawals: Spread out distributions to stay within lower tax brackets.
2. Consider Roth conversions: Converting traditional IRA funds to a Roth IRA could save on future taxes.
3. Leverage the pension exclusion: Understand how it applies to your situation and plan accordingly.
4. Explore charitable giving: Donations can reduce your taxable income.
5. Review your estate plan: Given Maryland’s estate and inheritance taxes, proper planning is crucial.

Conclusion and Next Steps

Understanding Maryland’s taxation of retirement income is essential for effective financial planning. While the state does tax many forms of retirement income, it also offers significant exclusions and exemptions that can benefit retirees.

To ensure you’re making the most of your retirement finances in Maryland:

1. Review your current and projected sources of retirement income.
2. Understand how each income source will be taxed.
3. Explore strategies to minimize your tax burden.
4. Consider consulting with a financial advisor familiar with Maryland’s tax laws.

At RCS Financial Planning, we specialize in helping retirees navigate Maryland’s tax landscape. Contact us today to schedule a consultation and optimize your retirement strategy.

Remember, tax laws can change, and individual situations vary. Always consult with a qualified tax professional or financial advisor for personalized advice.