Is Maryland Retirement Friendly? Taxes & Cost of Living

Understanding a state’s financial landscape is important when evaluating its suitability for retirement. Financial considerations extend beyond simply having sufficient savings; they involve how those savings will be impacted by local taxation and the overall cost of living. A state’s financial policies and economic environment can significantly influence a retiree’s purchasing power and the longevity of their retirement funds.

Prospective retirees often consider factors such as income tax policies on retirement distributions, property tax burdens, and sales tax rates. The daily expenses for housing, healthcare, utilities, and general consumer goods also play a substantial role in a retiree’s budget. Assessing these elements provides a comprehensive picture of how financially comfortable retirement might be in a particular area.

Taxation of Retirement Income

Maryland has a progressive income tax system, with state tax rates ranging from 2% to 5.75%. Each county also imposes a local income tax, typically between 2.25% and 3.30% of taxable income. These rates apply to various forms of income, including some retirement distributions.

Social Security benefits are not taxed by the state of Maryland. Retirees receiving these benefits can subtract the full amount of their Social Security income when filing their state tax return, offering a tax advantage for those whose primary income is Social Security.

Pension and annuity income is generally subject to state income tax. However, Maryland offers a significant pension exclusion for eligible retirees. For 2024, individuals aged 65 or older, or those who are totally disabled, may exclude up to $39,500 of eligible pension and retirement annuity income. This exclusion amount is reduced by any Social Security benefits received.

Military retirees also benefit from specific subtractions for their pension income. Individuals under age 55 can subtract up to $12,500 of military retirement pay, while those aged 55 and older can subtract up to $20,000. Additionally, certain public safety retirees, such as law enforcement or fire personnel, may be eligible for a separate pension exclusion.

Withdrawals from traditional IRAs are typically taxable as ordinary income in Maryland and generally do not qualify for the standard pension exclusion under current law. In contrast, qualified distributions from Roth IRAs and Roth 401(k)s are generally tax-free. Withdrawals from traditional 401(k) and 403(b) plans are taxable, though they may qualify for the pension exclusion.

A significant change is anticipated for tax year 2025 and beyond, as new legislation (House Bill 355) expands the types of retirement income eligible for the pension exclusion. Starting July 1, 2025, individual retirement accounts (IRAs) and Roth IRAs will become newly eligible sources for this exclusion. The bill aims to phase in a 100% exclusion of eligible retirement income by 2027.

Other investment income, including interest, dividends, and capital gains, is subject to Maryland’s standard income tax rates. The state does not offer preferential tax rates for long-term capital gains, taxing them at the same progressive rates as ordinary income. Effective for the 2025 tax year, a 2% capital gains tax surcharge applies to net capital gains for individuals with federal adjusted gross income exceeding $350,000.

Property and Sales Taxes

Property taxes in Maryland are assessed by the state’s Department of Assessments and Taxation, with properties revalued every three years. While the state does not set a single statewide property tax rate, its average effective property tax rate is around 1.02% of a home’s assessed value. Due to relatively high property values, Maryland homeowners often pay more in annual property taxes than in many other states, with the median annual payment being approximately $3,880.

Property tax rates vary significantly across counties, with urban and suburban areas generally having higher tax burdens. These local rates, combined with the state’s assessment, determine the final property tax bill.

Maryland offers several programs to help moderate property tax burdens. The Homestead Tax Credit limits the annual increase in a homeowner’s taxable assessment to 10% for their principal residence. Homeowners must submit a one-time application to benefit from this. This credit helps protect residents from rapid increases in their property tax bills following reassessments.

The Homeowners’ Property Tax Credit provides relief based on income. This credit caps the amount of property taxes a qualified resident pays, ensuring it does not exceed a certain percentage of their income. Eligibility is generally for households with a gross income under $60,000 and a net worth, excluding their home and retirement accounts, below $200,000. While an annual application is typically required, certain retirees relying on Social Security, pensions, and annuities may apply every three years.

Maryland also provides a state-level Senior Tax Credit for residents aged 65 and older. This nonrefundable credit can be up to $1,000 for single filers with a federal adjusted gross income not exceeding $100,000, and up to $1,750 for joint filers, surviving spouses, or heads of household with income not exceeding $150,000. This credit directly reduces the state income tax liability for eligible seniors.

Regarding sales taxes, Maryland imposes a statewide sales tax rate of 6%. Unlike some other states, there are no additional local sales taxes, meaning the rate remains consistent across all counties. This tax applies to most tangible goods and certain services purchased within the state.

Several common categories of goods are exempt from Maryland’s sales tax. Unprepared food items, such as groceries, are generally not subject to sales tax. Prescription medications and certain medical equipment also qualify for sales tax exemption. Higher sales tax rates apply to specific items, such as alcoholic beverages, which are taxed at 9%, and short-term passenger vehicle rentals, taxed at 11.5%.

Overall Cost of Living

Maryland’s overall cost of living is generally higher than the national average. Depending on the source, it can be approximately 1.1 to 1.16 times more expensive than the U.S. average, placing it among the more expensive states in the country. This elevated cost impacts various aspects of daily expenses for residents.

Housing costs are a significant contributor to Maryland’s higher cost of living. Median home prices in the state have recently ranged from approximately $406,600 to $462,300, which is notably above the national median. Rental costs are also elevated, with average monthly rent for a two-bedroom unit in 2025 being around $2,036. Housing affordability is a pressing concern, as many renters allocate a substantial portion of their income to housing expenses.

Utility costs in Maryland typically exceed national averages, with residents often paying around $400 to $450 per month for essential services. The average monthly electricity bill can range from approximately $127 to $279, depending on usage and specific rates, with average rates per kilowatt-hour generally higher than the national average. Internet service typically costs between $40 and $100 per month for basic to mid-tier plans, though average prices can be around $67.

Transportation expenses, including gasoline prices, are generally on par with or slightly above the national average. Public transportation options are available in urban centers, with monthly passes in cities like Baltimore costing around $75 to $100. These costs can fluctuate based on fuel prices and individual commuting needs.

Healthcare costs in Maryland are comparable to national averages, with some services, such as doctor check-ups and dentistry, potentially costing slightly more. For retirees utilizing Medicare, supplemental plans, known as Medigap, can add to monthly expenses. Average monthly premiums for a common Medigap Plan G range from approximately $131 to $180, though costs vary by provider and individual factors.

The cost of general consumer goods and services, including groceries, also contributes to the overall expense. Groceries in Maryland are typically priced slightly higher than the national average, with an average household spending around $8,237 annually on food at home. Other everyday necessities and discretionary spending on services and entertainment also reflect the state’s elevated cost of living.