Is Maryland Tax Friendly for Retirees?

Determining whether a state is “tax-friendly” for retirement is a complex calculation that extends beyond a single tax rate. An individual’s financial profile, including their sources of retirement income, the value of their home, and spending patterns, influences their overall tax burden. A state might offer low income taxes but impose high property taxes, so a holistic view is necessary to assess if Maryland’s tax structure aligns with a retiree’s circumstances.

State and Local Income Taxes on Retirement Income

Maryland employs a progressive state income tax system, with rates that range from 2% to 5.75%. Compounding this, each of Maryland’s 23 counties and Baltimore City levies an additional local income tax, which is a significant factor in a retiree’s total tax liability.

A major advantage for retirees in Maryland is the complete exemption of Social Security benefits from state and local income taxes. This means that no portion of Social Security income is included in Maryland taxable income, which can provide substantial tax savings.

The state offers the Pension Exclusion, which allows eligible retirees to subtract a portion of their retirement income. To qualify, a resident must be 65 or older, or totally and permanently disabled. The maximum exclusion is $39,500 and applies to income from sources like 401(k)s, 403(b)s, and traditional pension plans, but distributions from traditional IRAs are not eligible.

The Pension Exclusion amount can be reduced by any Social Security benefits the retiree receives. For instance, if a retiree receives $20,000 in Social Security benefits, their maximum Pension Exclusion would be reduced by that amount, leaving a potential exclusion of $19,500 on other eligible retirement income.

Maryland provides more favorable tax treatment for certain retirees. Military retirees under age 55 may subtract up to $12,500 of their military retirement income, and the subtraction increases to $20,000 for those age 55 and older. Retirees from law enforcement, fire, rescue, or emergency services organizations may also qualify for enhanced pension exclusion benefits.

Maryland Property Taxes for Homeowners

Property taxes in Maryland are managed and collected at the county and municipal levels. The tax is calculated based on the assessed value of a property, and the state provides programs designed to limit the tax burden for full-time residents.

The Homestead Property Tax Credit is not based on income but on increases in a property’s assessed value. It caps the amount a homeowner’s taxable assessment can increase each year, protecting them from sharp spikes in property taxes. To receive this credit, the property must be the owner’s principal residence.

For retirees on a limited income, the Homeowners’ Property Tax Credit offers another form of relief. This program provides a direct credit against the property tax bill if the taxes exceed a certain percentage of the homeowner’s gross income. Eligibility is determined by household income.

The state also allows local governments to offer a property tax deferral program. This allows residents aged 65 and older who meet certain criteria to defer increases in their county property tax bills. The deferred taxes become a lien on the property that must be paid when the home is sold or transferred.

Sales and Excise Taxes

Maryland levies a statewide sales tax of 6 percent, which applies to the sale of most tangible goods and some services. The exemptions offered within the sales tax code are noteworthy for retirees.

A significant benefit for residents is that Maryland exempts most grocery food items from the state sales tax. Furthermore, the state does not tax the sale of prescription drugs or over-the-counter medications.

The state sales tax applies to a wide range of consumer goods, from clothing and electronics to furniture and vehicles. In addition, Maryland imposes excise taxes on specific products like gasoline, tobacco products, and alcoholic beverages.

Estate and Inheritance Tax Considerations

Maryland is one of the few states that imposes both an estate tax and an inheritance tax. The estate tax is levied on the total value of a person’s estate before its assets are distributed, while the inheritance tax is paid by the individuals who receive property from the estate.

The Maryland estate tax applies only to estates that exceed an exemption of $5 million. For estates valued above this threshold, a tax is imposed on the excess amount.

The state’s inheritance tax depends on the relationship between the decedent and the beneficiary. Direct relatives, including spouses, children, grandchildren, parents, and siblings, are completely exempt from the inheritance tax.

For other beneficiaries, nieces, nephews, cousins, and friends are subject to a 10% inheritance tax on the value of the property they receive. This tax is paid by the beneficiary, not the estate, and can reduce the net value of an inheritance.