Maryland Tax Increase: What Retirees Need to Know

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, 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.

For Maryland retirees and pre-retirees, the 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 taxes.

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

Quick Answer: How the 2025 Maryland Tax Increase Affects Retirees

Maryland still does not tax Social Security benefits. The pension exclusion (up to $41,200 for 2025) and the senior tax credit (up to $1,750 for joint filers age 65 and older) are unchanged. The 2025 changes mainly affect retirees with federal AGI above $200,000, large traditional IRA balances, taxable brokerage accounts with notable unrealized gains, or rental and business properties they plan to sell.

If your federal AGI stays below $350,000 and your Maryland taxable income stays below $500,000 ($600,000 joint), many of the new tax increases will not apply to you directly.

Key Takeaways

• New top income brackets: A 6.25% rate on Maryland taxable income from $500,001 to $1 million ($600,001 to $1.2 million joint), and 6.5% above those amounts.
• 2% capital gains surcharge: Applies on top of regular state and county tax for filers with federal AGI above $350,000. Retirement account distributions and primary residence sales of $1.5 million or less (meeting federal exclusion rules) are exempt.
• Higher local cap: Counties may now impose income tax up to 3.3% (up from 3.2%).
• Itemized deduction phase-out: Itemized deductions are reduced by 7.5% of federal AGI above $200,000 ($100,000 if married filing separately).
•  Higher standard deduction: $6,700 joint (up from $4,500) and $3,350 single (up from $2,250).
• 3% tech tax: A new 3% sales tax on data, IT, and software publishing services, effective July 1, 2025.
• Other rate increases: Cannabis sales tax to 12%, mobile sports wagering tax to 20%, and vehicle excise tax to 6.5%.

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 income tax brackets for 2025 (high-income tiers):

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 meaningfully.

The surcharge generally does not apply to:

• Gains from assets held inside qualified retirement accounts (401(k), 403(b), 457(b), IRAs, and similar plans)
• Sale of a primary residence for $1.5 million or less, when the sale otherwise meets federal exclusion rules
• Property used in a trade or business and deductible under IRC Section 179
• Cattle, horses, or breeding livestock held more than 12 months
• Land sold subject to certain conservation, agricultural, or forest preservation easements
• Affordable housing sales by qualifying nonprofits

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.

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).

Quick example: A joint filer with $500,000 federal AGI and $50,000 of Maryland itemized deductions would lose $22,500 to the phase-out (7.5% of the $300,000 over the $200,000 threshold), leaving $27,500 in allowed itemized deductions.

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 $10,000 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 law left several retiree-friendly provisions in place:

• Social Security is still fully exempt from Maryland income tax. This applies to retirement, disability, and survivor benefits.
• The Maryland pension exclusion is unchanged. For 2025, eligible retirees age 65 and older (or who meet the disability requirements) may exclude up to $41,200 of qualifying retirement income, reduced dollar-for-dollar by Social Security and Railroad Retirement benefits. The exclusion applies to 401(k), 403(b), 457(b), and defined benefit pension distributions, not to traditional IRA distributions.
• The Maryland senior tax credit is unchanged. Maryland residents age 65 and older may qualify for a $1,000 credit (single, FAGI under $100,000) or $1,750 credit (joint, FAGI under $150,000).
• Military retirement subtraction is unchanged.

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.