Maryland Retirement Tax Credit: How to Save Up to $1,750 on Your 2025 State Taxes

Introduction

If you’re 65 or older and living in Maryland, you may be eligible for a state tax credit worth up to $1,750 annually—whether you’re retired, still working, or somewhere in between. Yet many Maryland seniors miss out on these savings simply because they don’t know the credit exists or how to claim it properly.

The Maryland Retirement Tax Elimination Act of 2022 created one of the most significant tax relief programs for seniors in the state’s history. Combined with Maryland’s pension exclusion and Social Security exemption, these benefits can dramatically reduce your state tax burden.

But here’s what makes this confusing: Maryland actually offers three separate tax benefits for seniors and retirees. The senior tax credit is based purely on age and income level—no retirement income required. The pension exclusion has strict account-type restrictions and only applies to certain retirement plans. And Social Security is exempt entirely from Maryland state tax.

Understanding which benefit applies to which income source—and how to structure your finances accordingly—can mean the difference between paying $3,000 in state taxes versus paying almost nothing.

In this guide, we’ll walk through exactly how Maryland’s three tax benefits work, who qualifies for each one, and how to maximize your savings in 2025.

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Understanding Maryland’s Three Tax Benefits for Seniors and Retirees

Maryland offers three distinct tax benefits that can significantly reduce your state tax burden. Each works differently, and maximizing your savings requires understanding what each one covers.

1. The Maryland Senior Tax Credit

This is a direct credit against your state income tax (not local tax), available to any Maryland resident who is 65 or older and meets income thresholds.

Critical clarification: You do not need to be retired or have pension income to qualify for this credit. It’s purely based on your age, residency, and Federal Adjusted Gross Income (FAGI) level—regardless of where that income comes from.

Whether your income comes from employment, investments, rental properties, pensions, Social Security, or any combination, you can claim this credit if you meet the age and income requirements. Even if you’re still working full-time at age 67, you qualify.

The credit is nonrefundable, meaning it reduces your state tax bill dollar-for-dollar, but if the credit exceeds your total state tax liability, you don’t receive the difference as a refund.

2. The Maryland Pension Exclusion

This benefit works differently—it excludes up to $41,200 (for 2025) of certain retirement income from being taxed in the first place.

The catch: it only applies to qualified employer retirement plans like 401(k)s, 403(b)s, and traditional pensions. IRA distributions, SEP-IRAs, and similar accounts don’t qualify. This is a completely separate benefit from the senior tax credit, with different rules about what income qualifies.

Additionally, the $41,200 maximum is reduced dollar-for-dollar by your Social Security and Railroad Retirement benefits.

3. Social Security Tax Exemption

Maryland doesn’t tax Social Security benefits at the state level. While your Social Security may still be taxable at the federal level, depending on your combined income, this state exemption provides meaningful savings for Maryland residents.

These three programs form the foundation of Maryland’s strategy to become more retirement-friendly and reduce the tax burden on seniors.

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The Maryland Senior Tax Credit: Simple Eligibility, Significant Savings

Let’s start with the senior tax credit created by the Maryland Retirement Tax Elimination Act of 2022. Despite its name suggesting it’s only for retirees, this credit is available to all Maryland seniors who meet the requirements—whether retired, working, or something in between.

Who Qualifies

Three simple requirements determine eligibility:

1. Age: You must be 65 or older by December 31st of the tax year.

2. Residency: You must be a Maryland resident for the full tax year. (Part-year residents do not need to prorate the credit, according to Maryland Publication 530.)

3. 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, head of household, or qualifying surviving spouse

That’s it. There are no restrictions on:

• Whether you’re retired or still working
• What type of income you have
• Whether you receive pension or retirement distributions
• How long you’ve lived in Maryland (as long as you’re a resident for the full tax year)

Your FAGI could come entirely from part-time employment, investment dividends, rental properties, business income, or any other source. As long as you’re 65+, a Maryland resident, and your FAGI stays below the threshold, you qualify.

These income limits are hard cutoffs. If your FAGI is $100,001 as a single filer or $150,001 filing jointly, you get nothing. This creates important planning opportunities around managing your FAGI, which we’ll discuss later.

Credit Amounts

The senior tax credit comes in two tiers:

Filing Status	Credit Amount
Single filer or married filing jointly (only one spouse 65+)	$1,000
Married filing jointly, head of household, or qualifying surviving spouse (both spouses 65+ if married)	$1,750

Real-world example: Maria, 68, and John, 67, file jointly with a combined FAGI of $135,000. Their income comes from:

• John’s part-time consulting: $45,000
• Maria’s pension: $35,000
• Investment dividends and interest: $25,000
• Social Security (taxable portion at federal level): $30,000

They owe $2,800 in Maryland state income tax (the credit doesn’t apply to local tax). The $1,750 credit reduces their actual state tax bill to $1,050—a 62% reduction.

If their state tax bill were only $1,400, they’d pay zero but wouldn’t receive the extra $350 as a refund because the credit is nonrefundable.

How to Claim the Credit

You claim the senior tax credit on Maryland Form 502CR, Part M. The credit amount is then carried to Part AA, Line 13, and flows through to Line 32 of your main Maryland tax return (Form 502, or the equivalent line on Forms 504, 505, or 515).

Most tax preparation software automatically calculates this credit if you enter your age and income correctly. However, it’s worth double-checking that it appears on your return if you qualify.

The 7.5% Revenue Safeguard

One provision worth noting: if Maryland’s September General Fund estimate falls more than 7.5% below the March estimate for the current fiscal year, the credit amount may be reduced. The Maryland Comptroller’s office monitors this fiscal safeguard, but it hasn’t been triggered since the program’s inception in 2023.

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The Maryland Pension Exclusion: Account Type Matters

While the senior tax credit is based purely on age, residency, and income limits, the pension exclusion is all about which accounts your retirement income comes from and how much Social Security you receive.

This is a completely separate benefit with completely different rules. You can qualify for both in the same year, but they work independently of each other.

Maximum Exclusion for 2025

The maximum pension exclusion for 2025 is $41,200. However, this amount is reduced dollar-for-dollar by your Social Security and Railroad Retirement benefits.

Your actual exclusion depends on a calculation using the Pension Exclusion Computation Worksheet, which we’ll explain below.

Who Qualifies

You qualify if, on the last day of the tax year, any of the following are true:

• You are 65 years or older, OR
• You are totally disabled, OR
• Your spouse is totally disabled (regardless of your age)

Critical difference from the senior credit: The pension exclusion has no income limits. A couple earning $250,000 can still use the pension exclusion (subject to the Social Security offset), even though they wouldn’t qualify for the senior tax credit (which cuts off at $150,000 FAGI).

Which Retirement Accounts Qualify

This is where many Maryland retirees make expensive mistakes. The pension exclusion applies only to distributions from employee retirement systems qualified under Internal Revenue Code §401(a), §403, or §457(b):

• Defined benefit pension plans
• 401(k) distributions
• 403(b) distributions
• 457(b) distributions
• 401(a) plan distributions
• Government employee retirement plans (federal, state, local)

Which Retirement Accounts Don’t Qualify

The exclusion does not apply to distributions from:

• Traditional IRA (including rollover IRAs)
• SEP-IRA
• SIMPLE IRA
• Roth IRA
• Keogh plans
• Ineligible deferred compensation plans
• Foreign retirement income

This is the single most expensive mistake we see: Retirees roll their 401(k) into a traditional IRA for account consolidation, not realizing they’ve just eliminated their eligibility for the pension exclusion.

At Maryland’s 6.50% top tax rate, losing access to the full $41,200 pension exclusion costs about $2,678 annually—or nearly $48,000 over a 20-year retirement.

The Social Security and Railroad Retirement Offset

The $41,200 maximum is reduced dollar-for-dollar by your Social Security and Railroad Retirement benefits that are not taxable to Maryland (which is all of them, since Maryland doesn’t tax Social Security).

You calculate your actual exclusion using the Pension Exclusion Computation Worksheet (13A), which follows this process:

1. Start with the $41,200 maximum
2. Subtract your Social Security and/or Railroad Retirement benefits
3. The result is your tentative exclusion
4. Your actual exclusion is the smaller of:
   • Your net taxable qualifying pension/annuity income, or
   • Your tentative exclusion (after the Social Security offset)

Example calculation:

Margaret, age 68, has:

• $38,000 in Social Security benefits (not taxable in Maryland)
• $50,000 in 401(k) distributions (qualifies for exclusion)

Her calculation:

• Maximum exclusion: $41,200
• Minus Social Security: -$38,000
• Tentative exclusion: $3,200
• Her 401(k) income: $50,000
• Her actual exclusion: $3,200 (the smaller of $50,000 or $3,200)

Margaret can only exclude $3,200 of her $50,000 in 401(k) income, making $46,800 taxable in Maryland.

Another example:

Robert, age 69, has:

• $20,000 in Social Security benefits
• $55,000 in 401(k) distributions

His calculation:

• Maximum exclusion: $41,200
• Minus Social Security: -$20,000
• Tentative exclusion: $21,200
• His 401(k) income: $55,000
• His actual exclusion: $21,200 (the smaller of $55,000 or $21,200)

Robert can exclude $21,200 of his $55,000 in 401(k) income, making $33,800 taxable in Maryland.

For many retirees, once Social Security payments reach $40,000+ annually, the Social Security offset completely eliminates the pension exclusion benefit.

However, the senior tax credit remains available regardless of Social Security benefits—as long as your FAGI stays below the threshold.

How to Claim the Pension Exclusion

You claim the pension exclusion on Maryland Form 502, Line 10a (or the equivalent line on Forms 504, 505, or 515).

Steps:

1. Complete Pension Exclusion Computation Worksheet 13A (available in the Maryland tax instruction booklet)
2. Enter the calculated exclusion amount on Form 502, Line 10a
3. Keep the worksheet with your tax records (you may need to file it with your return)

Most tax preparation software will automatically calculate this if you correctly identify which retirement accounts your income comes from and enter your Social Security benefits. However, it’s worth verifying that Line 10a shows the correct amount if you have qualifying pension income.

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Social Security: Completely Tax-Free in Maryland

The third piece of Maryland’s tax benefit puzzle is straightforward: Social Security benefits are completely exempt from Maryland state income tax.

This applies to:

• Retirement benefits
• Disability benefits
• Survivor benefits
• Railroad Retirement benefits
• Any Social Security income

While your Social Security may still be subject to federal income tax depending on your combined income, Maryland’s exemption provides meaningful savings. For a couple receiving $40,000 in Social Security annually, this exemption saves roughly $2,300 per year in state taxes.

This benefit requires no special forms or calculations—Social Security simply isn’t included in your Maryland taxable income.

However, as we discussed above, your Social Security benefits do reduce the pension exclusion amount dollar-for-dollar. So while Social Security itself isn’t taxed in Maryland, it does affect another tax benefit.

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How These Three Benefits Work Together

Understanding how the senior credit, pension exclusion, and Social Security exemption interact is key to maximizing your Maryland tax savings.

Here’s the order they’re applied:

1. Social Security is excluded from your Maryland income entirely (no state tax)
2. The pension exclusion reduces your taxable retirement income (but only from qualified plans, and reduced by Social Security)
3. The senior credit reduces whatever state tax liability remains (assuming you meet the age and FAGI requirements)

Comprehensive example:

Richard, age 67, is single with the following income:

• $35,000 from Social Security
• $50,000 from his former employer’s 401(k)
• $20,000 from a traditional IRA he rolled over years ago
• $8,000 from part-time consulting work

Step 1 – Calculate his FAGI:

• Social Security (taxable portion at federal level): ~$29,750
• 401(k): $50,000
• IRA: $20,000
• Consulting: $8,000
• Total FAGI: $107,750

Step 2 – Social Security Exclusion for Maryland:

• The $35,000 from Social Security is not taxable in Maryland at all

Step 3 – Pension Exclusion:

• Maximum exclusion: $41,200
• Minus Social Security: -$35,000
• Tentative exclusion: $6,200
• His 401(k) income: $50,000 (qualifies)
• His IRA income: $20,000 (does NOT qualify)
• His actual pension exclusion: $6,200 (applied to the 401k income)
• 401(k) taxable amount: $43,800 ($50,000 – $6,200)
• IRA taxable amount: $20,000 (no exclusion applies)
• Consulting taxable: $8,000
• Maryland taxable income from these sources: $71,800

Step 4 – Senior Credit:

• Richard’s FAGI is $107,750 (over the $100,000 threshold)
• He does NOT qualify for the senior credit because his income is too high
• After standard deductions and exemptions, his Maryland state tax liability might be around $2,400
• He pays the full $2,400 with no credit

What if Richard had lower income?

Let’s say Richard had the same sources but lower amounts:

• $28,000 from Social Security
• $40,000 from his 401(k)
• $15,000 from his IRA
• $5,000 from consulting
• FAGI: $88,000 (below the $100,000 threshold)

His taxes:

• Social Security: $0 (not taxable in Maryland)
• Pension exclusion: $41,200 – $28,000 = $13,200 available
• 401(k) exclusion: $13,200 (all of it, since he has $40,000 in qualified income)
• 401(k) taxable: $26,800
• IRA taxable: $15,000
• Consulting taxable: $5,000
• Maryland taxable income: $46,800
• State tax liability (after deductions): ~$1,400
• Senior credit: $1,000
• Actual state tax bill: $400

The combination of the pension exclusion and senior credit reduced his state tax from $1,400 to $400—a 71% reduction.

Important note: Richard would qualify for the senior tax credit even if he had zero retirement income. As long as his FAGI from any source stayed under $100,000, his age and residency would make him eligible. The $5,000 consulting income doesn’t disqualify him—it just counts toward his FAGI total.

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Strategic Planning: Maximizing All Three Benefits

The real opportunity lies in understanding how to structure your retirement accounts, income sources, and timing to capture the maximum benefit from all three programs.

Strategy #1: Preserve Access to the Pension Exclusion by Keeping Assets in Qualified Plans

This is the most important decision affecting the pension exclusion.

If you’re still working and have a 401(k) or 403(b):

• Consider keeping it with your employer (if allowed) or rolling it to a new employer’s plan
• Avoid rolling it to an IRA if you want to preserve pension exclusion eligibility
• Many employer plans allow you to keep your account indefinitely, even after retirement

If you’ve already rolled over to an IRA:

• Understand what that decision costs you annually in lost pension exclusion
• At maximum, it’s worth $2,370 annually in state taxes ($41,200 × 5.75%)
• In practice, with the Social Security offset, it’s often $500-$1,500 annually for most retirees
• Evaluate whether the investment flexibility is worth the cost
• Consider whether a reverse rollover back into a 401(k) makes sense (some plans allow this, but not all)

Real-world decision tree:

Sarah, 58, is leaving her employer with $600,000 in her 401(k). Should she roll it to an IRA?

Factors favoring IRA rollover:

• She wants access to specific investment strategies not available in the 401(k)
• She expects her retirement income to exceed $150,000 FAGI (so she won’t get the senior credit anyway)
• Her Social Security will be $42,000+ (which would eliminate the pension exclusion anyway via the offset)
• Her 401(k) has high fees or very limited investment options

Factors favoring keeping it in the 401(k):

• She expects retirement income under $150,000 FAGI (qualifies for both benefits)
• Her Social Security will be under $30,000 (leaving meaningful pension exclusion available)
• The 401(k) has reasonable fees and adequate investment options
• She values the potential $1,000-$2,000 annual pension exclusion benefit

This decision can easily swing $20,000-$50,000 in lifetime state taxes depending on her situation.

Strategy #2: Manage Your FAGI to Stay Under the Senior Credit Threshold

Since the senior credit is based purely on FAGI limits, strategic planning around what counts as income becomes critical if you’re near the threshold.

What increases your FAGI (potentially disqualifying you from the senior credit):

• Traditional IRA distributions
• 401(k) and pension distributions
• Capital gains from selling investments
• Dividends and interest income
• Rental property income
• Part-time employment income
• Business income
• Taxable portion of Social Security (at the federal level)

What doesn’t increase FAGI:

• Qualified Roth IRA distributions (tax-free withdrawals)
• Return of basis from non-qualified annuities
• Municipal bond interest
• Loans against your home or life insurance
• Gifts or inheritances

Planning opportunity: If you’re hovering around $95,000 FAGI as a single filer or $145,000 as a married couple, consider:

• Using Roth IRA distributions instead of traditional IRA withdrawals in a given year
• Delaying the sale of appreciated stock to next year
• Using qualified charitable distributions (QCDs) from your IRA to satisfy RMDs without increasing FAGI
• Deferring a bonus or consulting income if you’re still working part-time
• Timing required minimum distributions strategically
• Harvesting capital losses to offset gains

Example: Tom and Linda, both 66, typically have $145,000 in FAGI and receive the full $1,750 senior credit. Tom receives a $15,000 consulting opportunity in December.

Option A: Accept the consulting income in December

• New FAGI: $160,000
• They lose the entire $1,750 senior credit
• Cost: $1,750 in lost credit plus the state and federal taxes on the $15,000 income

Option B: Defer the consulting project to January

• FAGI stays at $145,000 for the current year
• They keep the $1,750 credit this year
• Next year’s FAGI will be $160,000, so they won’t get the credit then
• But they’ve preserved one year of the benefit

Option C: Accept the work but adjust other income

• Take $15,000 less from the traditional IRA this year
• Use Roth IRA withdrawals or existing cash instead
• FAGI stays at $145,000
• They keep the $1,750 credit
• They can take the deferred IRA distribution next year when the consulting income isn’t there

Remember: the senior credit doesn’t care whether you’re working, retired, or somewhere in between. It only cares about your age, residency, and total FAGI number.

Strategy #3: Time Large Withdrawals Strategically

If you need a large one-time distribution—for a home renovation, helping a child with a down payment, medical expenses, or any other major expense—timing matters for the senior credit.

Example: Susan and Tom, both 66, typically have $120,000 in FAGI and receive the full $1,750 senior credit. They need $60,000 for a home renovation.

Option A: Take the $60,000 from their traditional IRA this year

• New FAGI: $180,000
• They lose the $1,750 senior credit (over the $150,000 threshold)
• Cost: $1,750 in lost credit plus the state and federal taxes on the $60,000 distribution

Option B: Split the withdrawal across two years

• Take $30,000 this year and $30,000 next year
• FAGI stays at $150,000 both years (right at the threshold)
• They keep the $1,750 credit both years
• Savings: $3,500 in senior credits over two years

Option C: Take the $60,000 from Roth IRA instead (if they have one)

• FAGI stays at $120,000
• They keep the $1,750 credit
• The Roth withdrawal is tax-free at both state and federal levels
• Maximum tax savings

Option D: Use a home equity line of credit

• FAGI stays at $120,000
• They keep the $1,750 credit
• Debt interest may be tax-deductible if used for home improvements
• Repay the loan from taxable accounts or Roth accounts over time

This kind of planning—deciding which account to withdraw from and when, based on tax consequences—becomes increasingly important as you approach or exceed the FAGI thresholds.

Strategy #4: Understand Your Specific Benefit Profile

Not everyone will benefit equally from the senior credit and pension exclusion. Understanding your specific situation helps prioritize planning efforts.

Profile 1: High income, mostly from qualified plans

• Example: FAGI of $180,000 (above the senior credit threshold)
• Income from 401(k) and pension: $120,000
• Social Security: $30,000
• Strategy: You don’t qualify for the senior credit, but you get a pension exclusion of $11,200 ($41,200 – $30,000)
• Annual savings: ~$640 from pension exclusion only
• Priority: Keep assets in qualified plans, don’t worry about FAGI management

Profile 2: Moderate income, mix of qualified plans and IRAs

• Example: FAGI of $110,000 (under the senior credit threshold)
• Income split between IRA and 401(k): $70,000 total
• Social Security: $35,000
• Strategy: You qualify for the senior credit ($1,000 single or $1,750 joint), pension exclusion is worth $6,200 ($41,200 – $35,000)
• Annual savings: $1,000-$1,750 from senior credit, plus ~$350 from partial pension exclusion
• Priority: Manage FAGI to stay under threshold, consider account structure

Profile 3: Lower income, mostly from IRAs

• Example: FAGI of $75,000 (well under the senior credit threshold)
• Income mostly from IRA distributions: $50,000
• Social Security: $25,000
• Strategy: The pension exclusion won’t help you (IRAs don’t qualify), but you absolutely qualify for the senior credit
• Annual savings: $1,000 or $1,750 from senior credit only
• Priority: Manage FAGI, pension exclusion is already lost

Profile 4: Still working, minimal retirement income

• Example: FAGI of $90,000 from part-time employment and investments
• No pension or retirement distributions yet
• Strategy: You still qualify for the senior credit! Many people miss this.
• Annual savings: $1,000 or $1,750 from senior credit
• Priority: Track FAGI, consider future account positioning before rolling over 401(k)s

Profile 5: High Social Security, minimal pension exclusion available

• Example: FAGI of $95,000
• Social Security: $45,000 (eliminates pension exclusion)
• 401(k): $50,000
• Strategy: No pension exclusion benefit (SS offset eliminates it), but you qualify for senior credit
• Annual savings: $1,000 or $1,750 from senior credit only
• Priority: IRA vs. 401(k) doesn’t matter for state taxes, focus on FAGI management

In our work with Maryland retirees, we find that understanding which benefit matters most for your specific situation prevents wasted planning effort and helps you focus on strategies that actually move the needle.

Strategy #5: Coordinate with Federal Tax Planning and Medicare IRMAA

While these are state benefits, they interact with your overall tax picture in important ways.

Roth conversions: In years when you’re already above the FAGI threshold and not receiving the senior credit anyway, it might make sense to do larger Roth conversions. You’re not losing a benefit you’d otherwise have, and you’re reducing future RMDs that could push you over the threshold in later years.

Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can direct up to $105,000 (for 2024, indexed annually) from your IRA directly to charity. This satisfies your RMD without increasing your FAGI—helping you stay under the threshold for the senior credit.

Medicare IRMAA planning: Your Modified Adjusted Gross Income (MAGI) determines your Medicare Part B and Part D premiums through IRMAA brackets. For 2026, IRMAA surcharges begin at:

• $109,000 for single filers
• $218,000 for married filing jointly

Since FAGI and MAGI are closely related (MAGI adds back certain deductions like IRA contributions), many of the strategies that help you stay under the senior credit threshold also help you avoid IRMAA surcharges.

A couple with $155,000 FAGI loses:

• The $1,750 senior credit (over the $150,000 threshold)
• May also trigger the first IRMAA bracket (adding roughly $1,500-$2,000 in annual Medicare premiums)

Strategic planning around the $150,000 threshold can save $3,000-$4,000 annually when you consider both state taxes and Medicare premiums.

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Common Mistakes That Cost Maryland Seniors Money

After working with hundreds of Maryland retirees and seniors, we’ve identified several patterns that lead to missed savings:

1. Not realizing the senior credit applies to working seniors

Many people assume “retirement tax credit” means you need to be retired. Not true. If you’re 67 and still working part-time with $85,000 in total income, you qualify for the $1,000 credit. We regularly meet people who missed this for 3-5 years because they thought they had to be fully retired.

2. Rolling 401(k)s to IRAs without considering the pension exclusion

This is the costliest mistake for the pension exclusion. Rolling qualified plan assets to an IRA might simplify account management, but it eliminates pension exclusion eligibility.

However, the actual cost depends on your Social Security:

• If you have $42,000+ in Social Security, you’ve already lost the pension exclusion anyway (via the offset)
• If you have $15,000 in Social Security, the pension exclusion is worth $26,200 × 5.75% = $1,500 annually
• Over 20 years, that’s $30,000+ in lost tax savings

The senior credit still applies to IRA distributions (as long as your FAGI stays below the threshold), but the pension exclusion does not.

3. Not tracking FAGI throughout the year

Many people don’t realize they’ve crossed the $100,000 or $150,000 threshold until they file their taxes in April. By then, opportunities to manage income (delaying a withdrawal, using Roth instead of traditional IRA, deferring consulting income, etc.) are gone.

Consider doing a mid-year tax projection around July or August. This gives you time to make adjustments before year-end.

4. Taking large IRA distributions that unnecessarily push FAGI over the threshold

A $50,000 distribution for a car or home project might seem fine, but if it pushes you from $140,000 to $190,000 FAGI, you just lost a $1,750 credit.

Alternatives:

• Spread the withdrawal over two years
• Use Roth IRA funds instead
• Use a home equity line of credit
• Delay the purchase until January

5. Confusing which benefit applies to which account type

We regularly see people assume:

• IRA distributions qualify for the pension exclusion (they don’t)
• The senior credit requires retirement income (it doesn’t)
• Social Security reduces the senior credit (it doesn’t, though it does reduce the pension exclusion)
• You can’t get both benefits in the same year (you can, if you qualify for each)

These misunderstandings lead to poor account structure decisions and missed tax savings.

6. Not claiming the benefits on their Maryland return

Both the credit and exclusion require specific lines to be completed on your Maryland tax return. If your tax preparer isn’t familiar with these provisions (particularly the senior credit, which is relatively new as of 2023), you might be missing benefits you’re entitled to.

Check your Form 502:

• Line 10a: Pension exclusion subtraction
• Line 32: Senior tax credit (from Form 502CR, Part M)

If these lines are blank and you think you should qualify, you may have missed benefits.

7. Assuming they don’t qualify because of their income source

“I’m still working part-time, so I don’t qualify for the senior credit.” “I only have IRA income, so none of these benefits apply to me.” “My Social Security is too high, so I don’t get any tax breaks.”

All three statements are false:

• Working seniors qualify for the senior credit (if under the FAGI limit)
• IRA income counts for the senior credit (just not the pension exclusion)
• High Social Security eliminates the pension exclusion but doesn’t affect the senior credit at all

8. Not understanding the Social Security offset calculation

Many retirees are surprised to learn that their $40,000 in Social Security completely eliminates the $41,200 pension exclusion. The offset isn’t widely understood, leading to disappointment when filing taxes.

If your Social Security is high enough to eliminate the pension exclusion, the 401(k) vs. IRA decision doesn’t matter for Maryland state taxes (though it may still matter for federal tax planning and creditor protection).

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What This Means for Your Maryland Tax Planning

Maryland’s tax benefits for seniors are among the most generous in the region, but they require thoughtful planning to capture fully.

The interaction between income limits (for the senior credit), account-type restrictions (for the pension exclusion), and the Social Security offset creates both opportunity and complexity.

Three key questions every Maryland senior should consider:

Question 1: Am I managing my FAGI to stay under the threshold for the senior credit?

If your natural income level puts you at $95,000-$105,000 (single) or $140,000-$160,000 (married), small adjustments can preserve a $1,000-$1,750 annual credit.

Strategies include:

• Drawing from Roth accounts instead of traditional accounts in certain years
• Using QCDs to satisfy RMDs without increasing FAGI
• Timing capital gains, bonuses, or consulting income strategically
• Delaying or accelerating income between tax years

Even if you’re well over the threshold now, consider whether you’ll be under it in future years (perhaps when you stop working or when income naturally declines). Planning ahead for those years can maximize lifetime benefits.

Question 2: Should I keep my 401(k) with my employer, or roll it to an IRA?

The conventional wisdom says “consolidate everything into an IRA for simplicity and investment flexibility.”

But in Maryland, that decision could cost you pension exclusion benefits—though the actual cost depends heavily on your Social Security amount.

Decision framework:

If your Social Security will be $40,000+:

• The pension exclusion is already mostly or fully eliminated by the offset
• IRA vs. 401(k) doesn’t matter much for Maryland taxes
• Decide based on investment options, fees, and federal tax considerations

If your Social Security will be under $30,000:

• You have meaningful pension exclusion available ($11,200-$41,200)
• Worth $640-$2,370 annually in state tax savings
• Strongly consider keeping assets in qualified plans if the fees and investment options are reasonable

If your FAGI will be over $150,000:

• You won’t get the senior credit regardless
• Focus on the pension exclusion benefit only
• The decision depends on your Social Security offset

Question 3: When should I do Roth conversions?

Counterintuitively, the best years for Roth conversions might be when you’re over the FAGI threshold and not receiving the senior credit anyway.

Converting in these years doesn’t cost you any state benefits you’d otherwise receive, and it reduces future RMDs that might push you over the threshold later.

Ideal Roth conversion years:

• Before age 65 (before you qualify for the senior credit)
• Years when income is temporarily high (pushing you over $150,000 anyway)
• After Social Security starts (if it pushes you over the threshold)
• Early retirement years before RMDs begin

This is especially valuable if you expect income to fluctuate year-to-year between high and low tax years.

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Next Steps: Three Actions You Can Take Now

1. Calculate your projected FAGI for 2025

Make a list of your expected income from all sources:

• Employment income (if still working)
• Social Security (the taxable portion at the federal level—typically 50-85%)
• Pension and retirement plan distributions
• Investment income (dividends, interest, capital gains)
• Rental income
• Any other income sources

Add them up to estimate your FAGI. Compare it to the thresholds:

• Under $90,000 (single) or $140,000 (married): You’re comfortably under—focus on other planning
• $90,000-$105,000 (single) or $140,000-$155,000 (married): You’re near the threshold—income management strategies could be valuable
• Over $110,000 (single) or $160,000 (married): You won’t qualify for the senior credit—focus on the pension exclusion

2. Audit your retirement account structure

Make a list of your retirement accounts and their current balances:

• Qualified employer plans: 401(k), 403(b), 457(b), pensions
• IRAs: Traditional, SEP, SIMPLE, Roth
• Other retirement assets: Annuities, taxable accounts earmarked for retirement

Then calculate your Social Security:

• If $40,000+: Pension exclusion is mostly eliminated regardless of account structure
• If $20,000-$40,000: Partial pension exclusion available ($1,200-$21,200)
• If under $20,000: Strong pension exclusion available ($21,200-$41,200)

Based on your Social Security amount, evaluate whether keeping assets in qualified plans vs. IRAs matters for state tax purposes.

3. Review your most recent Maryland tax return

Pull out your 2023 or 2024 Maryland Form 502 and check:

• Line 10a: Are you claiming the pension exclusion properly?
• Line 32: Did you claim the senior tax credit?

If you’re 65+, a Maryland resident, and had FAGI under the threshold, Line 32 should show $1,000 or $1,750. If it’s blank, you may have missed the benefit.

If Line 10a is blank but you have 401(k) or pension income, you may have missed the pension exclusion (though check whether your Social Security eliminated it via the offset).

Consider filing an amended return: You can amend Maryland tax returns for up to 3 years. If you missed these credits in 2022, 2023, or 2024, you may be able to claim them retroactively and receive a refund.

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Work With a Maryland Retirement Tax Planning Specialist

Maryland’s tax benefits for seniors are generous, but maximizing them requires understanding the interaction between state tax rules, federal tax planning, Social Security timing, Medicare IRMAA management, and your overall financial strategy.

The families we work with appreciate having someone who can see the whole picture—not just prepare their tax return in April, but help structure their accounts and income throughout the year to minimize lifetime taxes.

If you’re 65 or older (or approaching 65) and living in Maryland, we’d be glad to review your specific situation and help you identify opportunities to reduce both state and federal taxes.

In a brief introductory call, we can:

• Verify whether you’re claiming both the senior credit and pension exclusion properly
• Calculate how the Social Security offset affects your pension exclusion
• Identify any account structure issues that might be costing you money
• Discuss strategies for managing your FAGI if you’re near the threshold
• Show you how Maryland tax planning fits into your broader retirement income strategy

Schedule an introductory call here to discuss your Maryland tax situation. There’s no pressure or obligation—just a straightforward conversation about whether these Maryland benefits apply to you, how to maximize them, and whether we can help.

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About Ted Toal, CFP®

Ted Toal is a Certified Financial Planner™ and founder of RCS Financial Planning in Annapolis, Maryland. He specializes in retirement income and tax planning for Maryland retirees and pre-retirees, with deep expertise in state-specific retirement tax strategies. Ted helps clients navigate the complexities of Maryland’s retirement tax landscape while building comprehensive, tax-efficient retirement plans that coordinate federal and state tax benefits.