The Maryland Retirement Tax Elimination Act
The Maryland Retirement Tax Reduction Act, signed into law by Governor Larry Hogan, is a tax relief package offering a tax credit for retirees.
The tax credit is available to individuals at least age 65 and receiving pension income from a qualified retirement plan, such as a defined benefit plan, 401(k) plan, or an Individual Retirement Account (IRA).
The tax credit amount is based on your Federal Adjusted Gross Income. The credit is designed to help offset the tax burden on retired individuals and make it easier for them to maintain a comfortable standard of living in retirement.
Further, Governor Larry Hogan hopes the retirement tax elimination act will help Maryland become more tax-friendly for retirees, as many surrounding states have more favorable income tax laws for retirees.
Maryland Retirement Tax Reduction Act
The Maryland Retirement Tax Reduction Act will help Maryland retirees enjoy more of their hard-earned money. Marylanders 65 and older with Federal Adjusted Gross Income up to $100,000 and married couples with Federal Adjusted Gross Income up to $150,000 in retirement income are eligible for this “Maryland Senior Credit.”
As a result of the Maryland Retirement Tax reduction Act, 80% of Maryland’s retirees will receive substantial relief or pay no state income taxes.
Starting in 2022, Taxpayers 65+ receive a tax credit, if their Federal AGI is less than:
- $100,000 – Single / Married Filing Separate
- $150,000 – Married Filing Jointly, Qualified Survivor, Head of Household
The savings will come from a nonrefundable Maryland tax credit. The credit amount is $1,000 for an individual filer or a couple with only one spouse aged 65 or older. For joint filers both 65 or older, the credit amount is $1,750.
However, it’s important to understand this 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.
In addition to this new tax credit, Maryland residents benefit from other tax savings opportunities.
Maryland Pension Exclusion 2022
Maryland currently taxes retirement income, including pension income, at the same rates as other types of income. Maryland’s progressive income tax rates range from 2% to 5.75%. It’s important to note that all Maryland Counties (and Baltimore City) levy a local income tax that ranges from 2.25% and 3.20%.
However, Maryland offers a pension exclusion for certain types of retirement income, including qualified defined benefit and defined contribution pension plans, 401(a) plans, 401(k) plans, 403(b) plans, and 457(b) plans. (Traditional IRAs, Roth IRAs, simplified employee plans (SEP), Keogh Plans, or ineligible deferred compensation plans do not qualify for the pension exclusion.)
In 2022, the Maryland pension exclusion amount is $34,300.
However, it’s important to note Maryland’s pension exclusion does consider untaxed Social Security benefits and the pension exclusion can be reduced or eliminated. This pension exclusion is separate from the new Senior Tax Credit explained in this article.
Maryland also offers a separate military pension exclusion that allows a portion of military retirement pay to be exempt from state taxes. Qualified military retires may subtract $5,000 from their Maryland gross income before determining their Maryland taxable income. For those military retirees 55 and older, this subtraction increases to $15,000.
Does Maryland Tax Social Security?
In Maryland, Social Security income is not taxed at the state level – you do not have to pay Maryland state taxes on those benefits. However, at the Federal level, taxation of Social Security benefits depends on your income level and tax filing status.
In general, Social Security benefits are not subject to federal income tax. However, if you have other sources of income, such as wages or investment income, your benefits may be partially taxable. Retirees must also monitor Medicare IRMAA surcharges at the federal level.
Retirement Tax Reduction Act of 2022 – Conclusion
The Maryland Retirement Tax Reduction Act has the potential to greatly impact tax savings for Maryland retirees. It is important to consult with your financial advisor to fully understand the financial implications of this legislation and make informed decisions about your retirement savings. Your advisor should be able to project your Maryland taxes, calculate the Act’s potential impact on your retirement income, and develop a personalized strategy to optimize your savings and ensure a secure financial future!
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