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:

Governor Wes Moore’s Budget Tax Proposals: What’s Changing

Governor Wes Moore’s FY 2026 budget includes significant tax changes that could impact retirees—particularly those with estates over $2 million or those who have historically itemized deductions on their Maryland tax return.

Estate and Inheritance Taxes

The budget proposes reducing the Maryland estate tax exemption from $5 million to $2 million ($4 million for married couples), meaning more estates will now be subject to taxation. Maryland’s estate tax rate ranges from 8% to 16%, depending on the estate’s size. For retirees with significant assets—including homes, retirement accounts, and other investments—this change could increase the need for proactive estate planning to minimize future tax burdens on heirs.

At the same time, Maryland’s inheritance tax will be eliminated, but this has little impact on most retirees. The 10% inheritance tax only applied to non-immediate family members—such as nieces, nephews, and unrelated heirs. Spouses, children, grandchildren, and other close relatives were already exempt, meaning most retirees’ heirs weren’t paying this tax anyway. While its elimination may benefit a small group of non-direct heirs, the bigger issue for retirees is the lower estate tax exemption.

Eliminating Itemized Deductions: Who Pays More?

The budget also proposes doubling the standard deduction and eliminating itemized deductions—a change being marketed as “simplification.” However, most retirees who currently itemize will likely see higher taxes because they will lose deductions for:

• Mortgage interest (if they still have a mortgage)
• Large charitable donations
• Significant medical expenses

Retirees with high medical costs, in particular, may feel the impact, as those expenses will no longer be deductible under Maryland’s tax code. The result? Many retirees who previously lowered their taxable income through deductions will end up paying more.

Capital Gains Surcharge Based on Federal AGI

A new 1% capital gains surcharge will apply to households with federal adjusted gross income (AGI) above $350,000. Since AGI includes all income sources before deductions, more retirees could be affected—especially those with substantial Social Security benefits, required minimum distributions (RMDs), or investment income. Selling appreciated assets such as stocks, real estate, or a business could also trigger this surcharge.​

Other Tax Changes

While less relevant to most retirees, the budget also proposes:

• New tax brackets for high earners – Households with taxable income above $500,000 would see a 6.25% tax rate, while those above $1 million would face a 6.5% rate.
• Higher taxes on gambling and cannabis – The sports wagering tax will increase from 15% to 30%, table games from 20% to 25%, and the cannabis tax will rise from 9% to 15% starting in FY 2027.

What This Means for Retirees

If you’ve planned your estate around Maryland’s previous $5 million exemption, it may be time for a review. More estates will now face a tax of up to 16% on assets above $2 million, making proactive planning essential. Additionally, if you currently itemize deductions—particularly for medical expenses or charitable giving—you may see higher taxes under the new rules.

If you’re concerned about how these changes could impact your retirement and estate plan, schedule a call with us to review your situation and explore potential strategies.

Note: These proposals are still in the discussion phase and may evolve as they move through the legislative process. It’s crucial for readers—especially those approaching or enjoying retirement—to keep abreast of these changes and consult with a financial advisor about potential impacts on their personal situation.

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Looking Ahead

Maryland has a long history of reliable tax policies for retirees, but fiscal pressures are prompting a reconsideration of these traditions. Governor Moore’s proposals signal a forward-thinking approach to revenue that may redefine how retirement income is taxed. We’ll continue updating this post as more details become available.

For further details on the proposals, check out the Tax Foundation’s full analysis here.

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.

Ted Toal is a Certified Financial Planner™ specializing in retirement income and tax planning for affluent professionals and business owners. With over 25 years of experience in wealth management, Ted helps clients transform retirement uncertainty into financial confidence through dynamic planning strategies.