Does Maryland Tax Interest Income? What to Know

Interest income is typically subject to taxation at both federal and state levels. Maryland has specific provisions governing the taxability of interest for its residents.

Maryland’s General Rule for Interest Income

Maryland generally treats most forms of interest income as taxable, aligning with federal income tax principles. The state’s income tax system begins its calculation with federal adjusted gross income (AGI). Interest income included in federal AGI is typically subject to Maryland state income tax. Any interest income taxable at the federal level will likely also be taxable in Maryland.

Common Sources of Taxable Interest

Common sources of interest income are subject to taxation in Maryland. This includes interest from traditional savings accounts, checking accounts, and certificates of deposit (CDs) held at financial institutions. These earnings are included in federal AGI.

Interest from corporate bonds is fully taxable in Maryland. Earnings from money market accounts also contribute to taxable income. Interest received from an installment sale is considered taxable income.

Interest Income Exemptions

While much interest income is taxable, certain types are exempt from Maryland state income tax, even if included in federal AGI. A notable exemption applies to interest from U.S. Treasury obligations, such as Treasury bonds, notes, and bills. This exemption stems from federal law, which prohibits states from taxing income derived from federal government securities. This also extends to interest received from mutual funds that invest in U.S. government obligations.

Interest from certain bonds issued by the State of Maryland or its political subdivisions, such as counties or municipalities, may also be exempt. This exemption applies only if the bonds are issued by Maryland entities and are explicitly designated as tax-exempt under Maryland law. Not all municipal bonds are exempt; the exemption usually applies only to bonds issued within Maryland.

Certain U.S. savings bonds, like Series EE and I bonds, may offer tax benefits, particularly if used for qualified higher education expenses. This federal exclusion can flow through to the state level.

Reporting Requirements for Maryland Taxpayers

Taxpayers report their interest income on their Maryland state income tax return, based on federally submitted information. Most taxable interest income flows directly from the federal tax return.

For any interest income exempt from Maryland tax but included in federal AGI, taxpayers must make an adjustment. This involves a subtraction modification on their Maryland state tax return, such as on Form 502. This ensures only taxable interest income is subjected to Maryland state taxes.

Interest income, a common earnings source for many individuals, is typically subject to taxation at both the federal and state levels. Each state establishes its own set of rules and exemptions regarding how it treats various types of interest income. Maryland, like many other jurisdictions, has specific provisions governing the taxability of interest for its residents.

Maryland’s General Rule for Interest Income

Maryland generally treats most forms of interest income as taxable, aligning closely with federal income tax principles. The state’s income tax system often begins its calculation with the federal adjusted gross income (AGI) as reported on a taxpayer’s federal return. Consequently, interest income included in a taxpayer’s federal AGI is typically subject to Maryland state income tax. This applies unless a specific exemption is provided under Maryland law.

Any interest income that is considered taxable at the federal level will likely also be taxable in Maryland. Taxpayers should generally anticipate that interest earned will contribute to their Maryland taxable income. This foundational principle guides how various types of interest are assessed within the state.

Common Sources of Taxable Interest

Numerous common sources of interest income are typically subject to taxation in Maryland. Interest earned from traditional savings accounts, checking accounts, and certificates of deposit (CDs) held at financial institutions generally falls into this category. These earnings are reported by financial institutions, often on Form 1099-INT, and are included in federal AGI.

Additionally, interest derived from corporate bonds, which are debt instruments issued by companies, is fully taxable in Maryland. Earnings from money market accounts, which are interest-bearing accounts that typically pay higher interest rates than savings accounts, also contribute to taxable income. Even interest received from an installment sale, where a buyer makes payments over time for property, is considered taxable income.

Interest Income Exemptions

While much interest income is taxable, certain types are specifically exempt from Maryland state income tax, even if they are included in federal AGI. A notable exemption applies to interest earned from obligations of the U.S. Treasury, such as Treasury bonds, notes, and bills. This exemption stems from federal law, which prohibits states from taxing income derived from federal government securities.

Interest from certain bonds issued by the State of Maryland or its political subdivisions, such as counties or municipalities, may also be exempt. This exemption typically applies only if the bonds are issued by Maryland entities and are explicitly designated as tax-exempt under Maryland law. It is important to note that not all municipal bonds are exempt, and the exemption usually applies only to bonds issued within Maryland.

Furthermore, certain U.S. savings bonds, like Series EE and I bonds, may offer tax benefits, particularly if used for qualified higher education expenses. While this is primarily a federal exclusion, it can flow through to the state level. These specific exemptions are important for taxpayers to recognize when calculating their Maryland taxable income.

Reporting Requirements for Maryland Taxpayers

Taxpayers generally report their interest income on their Maryland state income tax return, building upon the information submitted federally. Most taxable interest income flows directly from the federal tax return, often originating from Schedule B (Interest and Ordinary Dividends) of Form 1040. This simplifies the initial reporting process for many individuals.

For any interest income that is exempt from Maryland tax but was included in federal AGI, taxpayers must make an adjustment. This typically involves a subtraction modification on their Maryland state tax return, such as on Form 502, Individual Income Tax Return, by utilizing the appropriate lines for subtraction modifications found on Form 502SU. This ensures that only the truly taxable interest income is subjected to Maryland state taxes.