Maryland Retirement Tax Elimination Act: A Complete Guide to 2025 Tax Savings for Retirees

Introduction: Tax Relief for Maryland’s Retirees

The Maryland Retirement Tax Elimination Act of 2022 represents a landmark victory for retirees across the state. Signed into law by Governor Larry Hogan, this legislation delivers the largest tax cut package in Maryland’s history specifically designed to benefit seniors and make Maryland more retirement-friendly.

If you’re 65 or older and receive income from pensions, 401(k)s, IRAs, or other qualified retirement plans, this new state income tax credit could significantly reduce your tax burden. With potential savings of up to $1,750 for eligible couples, understanding how to qualify and apply for these benefits is essential for your retirement planning.

In this comprehensive guide, we’ll walk you through everything you need to know about the Maryland Retirement Tax Elimination Act, additional pension exclusions, and how to maximize your tax savings in 2025.

Who Qualifies for the Maryland Retirement Tax Credit?

The Maryland Retirement Tax Elimination Act creates a valuable tax credit designed specifically for senior residents. To qualify for this tax benefit, you must meet these specific criteria:

• Age requirement: You must be 65 years or older
• Income type: You must receive pension income or distributions from qualified retirement plans (401(k)s, 403(b)s, IRAs, defined benefit plans)
• Income limits: Your Federal Adjusted Gross Income (FAGI) must fall below:
  • $100,000 for single filers or married filing separately
  • $150,000 for married filing jointly, qualified survivors, or heads of household

These income thresholds were carefully established to provide maximum benefit to middle-income retirees while ensuring the program’s fiscal sustainability.

How Much Can You Save? Understanding Credit Amounts

The Maryland Retirement Tax Credit works as a nonrefundable credit against your state income taxes. Here’s what you can expect:

• $1,000 credit: Available for individual filers or couples with only one spouse 65+
• $1,750 credit: Available for joint filers where both spouses are 65+

As a nonrefundable credit, it reduces your tax liability but won’t generate a refund if the credit exceeds your total tax obligation. This distinction is important when planning your overall tax strategy.

Important note: The credit amount may be reduced if the September General Fund Estimate for the fiscal year is more than 7.5% below the March General Fund Estimate for the current fiscal year. This safeguard helps maintain Maryland’s fiscal stability while still providing significant tax relief to seniors.

Maryland Pension Exclusion: Additional Tax Relief in 2025

Beyond the Retirement Tax Elimination Act credit, Maryland offers an additional pension exclusion that further reduces taxable retirement income. This exclusion applies to:

• Qualified defined benefit pension plans
• Defined contribution plans (401(k), 403(b), 457(b))
• 401(a) plans

For 2024, the maximum pension exclusion is $39,500.

Who Qualifies for the Pension Exclusion?

To qualify for this significant tax break, you must be:

• 65 or older, OR
• Fully disabled (or have a disabled spouse)

Plans That Don’t Qualify for the Pension Exclusion

It’s important to note that not all retirement accounts qualify. The following plans are not eligible for the pension exclusion:

• Traditional IRAs
• Roth IRAs
• Simplified Employee Plans (SEPs)
• Keogh Plans
• Ineligible deferred compensation plans

Additionally, untaxed Social Security benefits can affect your pension exclusion, potentially reducing or eliminating this benefit. Working with a qualified tax professional can help navigate these complexities.

Social Security Benefits: Tax-Free at the State Level

Good news for Maryland retirees: Social Security benefits are completely exempt from Maryland state taxes. This significant tax advantage complements the other retirement tax relief measures and enhances Maryland’s appeal as a retirement destination.

While Social Security may still be subject to federal taxation depending on your income level, Maryland’s exemption provides meaningful savings for retirees. This policy aligns with Maryland’s broader efforts to become more tax-friendly for seniors.

Combining Tax Benefits: Maximizing Your Retirement Savings

To truly optimize your tax situation as a Maryland retiree, consider these strategic approaches:

1. Leverage both the tax credit and pension exclusion: These benefits work in tandem, not in opposition
2. Time your retirement distributions wisely: Strategic withdrawal planning can help maintain eligibility for these tax benefits
3. Consider the impact on other tax credits: Work with a financial advisor to ensure you’re maximizing all available tax advantages
4. Plan for the long term: These tax benefits may evolve over time, requiring adaptive financial strategies

Next Steps: Securing Your Retirement Tax Advantages

The Maryland Retirement Tax Elimination Act represents an unprecedented opportunity to enhance your financial security in retirement. However, navigating these complex tax provisions requires specialized knowledge and careful planning.

Your retirement income—including dividends, capital gains, and distributions—has a nuanced relationship with these tax credits and exclusions. Making informed decisions now can lead to significant tax savings and enhanced financial stability throughout your retirement years.

Take Action Today

Don’t leave your retirement tax strategy to chance. Our team of qualified financial advisors specializes in helping Maryland retirees maximize their tax advantages while building sustainable retirement plans.

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.