Maryland Tax Increase: What Retirees Need to Know (Updated for 2026)

The 2025 Maryland tax increase represents a notable update to the state tax code. Signed into law in May 2025 as the Budget Reconciliation and Financing Act (HB 352), the new rules add two higher income tax brackets, introduce a 2% capital gains surcharge, and expand the sales tax to cover certain technology services. The income tax provisions apply to tax years starting in 2025, and the sales tax expansion took effect July 1, 2025.

A separate federal law, the One Big Beautiful Bill Act (OBBB) signed July 4, 2025, layers federal-level changes on top of these Maryland updates. For Maryland retirees and pre-retirees, the two sets of changes affect several common planning decisions, including when to convert a traditional IRA to a Roth, when to sell appreciated stock or real estate, and how withdrawals from different account types interact with state and federal taxes.

MY Wealth Management is a registered investment adviser based in Germantown, Maryland. Below is a plain-English summary of what changed at both the state and federal levels, who is affected, and several planning considerations that may be relevant for Maryland retirees.

What Changed: The Budget Reconciliation and Financing Act of 2025

In the 2025 legislative session, Governor Wes Moore signed the Maryland Budget Reconciliation and Financing Act (HB 352), addressing a projected $3.3 billion budget deficit. The law modifies personal income tax rates, creates a new capital gains surcharge, expands the sales tax base, and adjusts pass-through entity tax rules.

The income tax changes apply to tax years beginning after December 31, 2024, and the sales tax expansion took effect July 1, 2025. The capital gains surcharge is currently scheduled to apply for tax years 2025 through 2028.

For retirees living on a mix of Social Security, pensions, IRA withdrawals, and investment income, the practical takeaway is that the income tax bracket changes apply only at higher AGI levels, but the rules around capital gains and itemized deductions can affect a wider range of households.

Personal Income Tax: New Top Brackets

Before 2025, Maryland's top state-level rate was 5.75%, applied to taxable income above $250,000 ($300,000 for joint filers). The new law keeps that 5.75% bracket and adds two new tiers above it.

Maryland state income tax brackets for 2025 (high-income tiers). County income tax applies separately at rates of 2.25%–3.3%.

At the county level, the maximum local income tax rate increased from 3.2% to 3.3%, and counties may now use a progressive structure rather than a flat rate.

What This Means for Retirees

If you are planning a large traditional IRA distribution, a Roth conversion, or selling an asset that pushes Maryland taxable income above $500,000 ($600,000 joint), part of that income now falls into the 6.25% or 6.5% bracket instead of 5.75%. For a $200,000 amount that crosses into the 6.25% bracket, that is roughly $1,000 in additional Maryland tax, before county tax.

Spreading large conversions or distributions across multiple tax years may keep some of the income in the 5.75% tier, depending on individual circumstances. Whether this approach is appropriate depends on each retiree's overall income picture, future tax rate expectations, account types, time horizon, and other factors. We discuss tax-aware sequencing of distributions and conversions with clients as part of broader retirement planning, in coordination with their CPA or tax professional.

The 2% Capital Gains Surcharge

A notable change is a new 2% surcharge on net capital gains for individuals with federal AGI above $350,000. This sits on top of regular state and local income tax, so for a high earner in a high-tax county, the effective Maryland tax on long-term capital gains can climb considerably.

For retirees, the practical questions are: Are you near the $350,000 AGI threshold? Do you have appreciated stock, a rental property, or a small business interest you may sell during retirement? If yes, the timing and sequencing of those sales matter more than they did in 2024. Decisions in this area depend on individual facts, and outcomes vary based on holding period, basis, character of gain, and other tax considerations.

How the Federal OBBB Layers On Top

The federal One Big Beautiful Bill Act, signed July 4, 2025, made several changes that interact with the Maryland rules above. The three most relevant for Maryland retirees:

Federal Senior Bonus Deduction ($6,000 per person, age 65+)

For tax years 2025 through 2028, the OBBB adds a $6,000 per-person bonus deduction for taxpayers age 65 and older. It is available whether you take the standard deduction or itemize, and sits on top of the existing age-65+ additional standard deduction. The deduction phases out beginning at $150,000 MAGI (joint) and $75,000 MAGI (single), and disappears entirely at $250,000 joint / $175,000 single. This deduction reduces federal taxable income, not federal AGI, so it does not flow directly to your Maryland return.

SALT Cap Increase to $40,400

The federal cap on state and local tax deductions increases from $10,000 to $40,400 for taxpayers with MAGI below $500,000, with a phase-down for higher incomes and a scheduled reversion to $10,000 in 2030. For Maryland residents who pay both state income tax (up to 6.5%) and county income tax (2.25% to 3.3%) plus property tax, the higher cap may unlock notable federal itemized deductions that were previously capped out.

Federal Estate Tax Exemption Increase

The federal estate tax exemption is permanently raised to $15 million per person ($30 million per couple) starting in 2026. This does not affect Maryland's separate state estate tax, which has a $5 million per-person exemption that is not indexed to inflation. Maryland retirees with estates between $5 million and $15 million may now be exempt from federal estate tax but still owe Maryland estate tax, which is a planning gap worth understanding.

Standard Deduction and Itemized Deduction Changes

The Maryland standard deduction increased for 2025:

• Joint filers, qualifying surviving spouses, head of household: $6,700 (up from $4,500)
• Single filers and others: $3,350 (up from $2,250)

If you itemize on your Maryland return, the new law also adds a phase-out. Itemized deductions are now reduced by 7.5% of federal AGI above $200,000 ($100,000 for married filing separately).

For many retirees with mortgage interest, property taxes (capped by the federal SALT limit), and charitable giving, the higher standard deduction may produce a different result than itemizing. We routinely run both calculations during tax planning meetings.

Pass-Through Entity (PTE) Tax Changes

If you own an interest in an LLC, S-corporation, or partnership, the law clarifies how Maryland's PTE election works for tax years beginning in 2026.

• Resident members: Taxable income is the full distributive share of the entity's income, with all of it apportioned to Maryland.
• Nonresident members: Taxable income is limited to the share derived from the entity's Maryland business activities.

Maryland's PTE election allows the entity itself to pay state tax on behalf of its members, which can help work around the federal SALT deduction cap. If you receive K-1 income, this is worth reviewing with your CPA before the 2026 estimated tax payments are due.

What Did Not Change for Maryland Retirees

This is just as important as what did change. The 2025 Maryland law left several retiree-friendly provisions in place, though the pension exclusion amount itself is updated each year.

Used together, these provisions may reduce a Maryland retiree's state tax bill, depending on age, income level, type of retirement income, and other factors.

A bill to expand the pension exclusion to IRAs (HB 707) was introduced in the 2026 session but remains proposed legislation as of this writing. A similar 2025 bill, HB 355, died in committee.

How These Changes Interact in a Real Maryland Retirement Plan

Looking at any one of these items in isolation can be misleading. The federal Senior Bonus Deduction, the federal SALT cap, the Maryland pension exclusion, the Maryland Senior Tax Credit, the Maryland capital gains surcharge, and the Maryland itemized deduction phase-out all flow through federal AGI in different ways, and several share the same general income ranges as a phase-out trigger. A single planning decision in one year, such as when to do a Roth conversion, when to take a large IRA distribution, or when to sell appreciated stock, can move several of these levers at once.

For Maryland retirees in or near retirement, the relevant question is not which deduction is largest but what their income looks like over the next decade, and how to sequence withdrawals and conversions to keep more of it. A retirement income plan designed with both federal AGI thresholds and Maryland-specific rules in view tends to produce meaningfully different results from a plan that focuses only on the federal side.