Maryland Retiree Tax Relief Programs Explained

Maryland provides several tax relief opportunities for its retired residents. These benefits address various aspects of a retiree’s financial life, from income taxes to property taxes. Understanding these programs is a key part of managing finances in retirement. This guide offers a look into the state-level tax advantages available to retirees in Maryland, helping them navigate their obligations and potential savings.

Maryland’s Taxation of Retirement Income

All Social Security and Railroad Retirement benefits are fully exempt from Maryland’s state income tax. If any portion of these benefits is taxed at the federal level, Maryland allows a subtraction to remove that amount from the state’s taxable income calculation. This exemption provides a substantial benefit to many retirees.

Other forms of retirement income are subject to Maryland’s income tax before any specific relief measures are applied. Distributions from traditional IRAs, 401(k)s, 403(b)s, and both private and public pension plans are included in a taxpayer’s Maryland adjusted gross income. The state’s graduated income tax rates are then applied to this income.

While it taxes most retirement plan withdrawals, the combination of the full Social Security exemption and available deductions creates a more favorable environment. For instance, income from military retirement plans receives its own specific deduction, separate from other pension exclusions.

The Pension Exclusion Amount

A feature of Maryland’s tax relief for retirees is the Pension Exclusion, which was enhanced by the Retirement Tax Reduction Act of 2022. This legislation introduced a nonrefundable tax credit for qualifying seniors, effectively reducing their state income tax liability.

Eligibility for this tax relief is based on both age and income. A taxpayer must be 65 or older to qualify. The benefit is also subject to income limitations based on Federal Adjusted Gross Income (FAGI). For the 2023 tax year, the FAGI must be below $100,000 for single, married filing separately, and dependent filers, and below $150,000 for those filing as married filing jointly, head of household, or qualifying surviving spouse.

The amount of the credit is fixed based on filing status. An eligible individual can receive a credit of $1,000. For married couples filing a joint return where both spouses meet the age and income requirements, the credit increases to $1,750. The income that qualifies for this treatment includes distributions from a wide array of retirement plans, such as pensions, 401(k)s, 403(b)s, and IRAs.

Claiming Retirement-Related Income Tax Subtractions

To benefit from Maryland’s retirement income tax relief, taxpayers must complete specific forms as part of their annual state income tax filing. The primary form for all Maryland residents is Form 502, the Resident Income Tax Return. The process of claiming the pension exclusion and other subtractions involves an additional document: Form 502SU, titled “Subtractions from Income.”

On Form 502SU, taxpayers will find specific lines dedicated to different types of subtractions. For the pension exclusion, filers must enter their qualifying retirement income and calculate the allowable subtraction amount based on their age and disability status. Once the total subtractions are calculated on Form 502SU, the final amount is transferred to a designated line on the main Form 502, reducing the taxpayer’s Maryland adjusted gross income.

Taxpayers can access these forms directly from the Comptroller of Maryland’s website. It is important to use the correct year’s forms, as the subtraction amounts and rules can change. For those claiming the new retirement tax credit, the calculation is made on Form 502CR, “Tax Credits for Individuals,” and the resulting credit amount is then entered on Form 502.

Property Tax Credits for Retirees

Beyond income tax relief, Maryland offers property tax assistance through the Homeowners’ Property Tax Credit Program. This program is not exclusively for retirees, but its income-based eligibility makes it beneficial for seniors on fixed incomes. The credit works by setting a limit on the amount of property taxes a homeowner is required to pay, based on their total household income.

Eligibility for the credit is determined by the combined gross household income of all members of the household. The State Department of Assessments and Taxation (SDAT) sets the income limits annually. If a homeowner’s property tax bill exceeds a certain percentage of their income, the state provides a credit for the difference.

This credit requires a separate application process that is not part of the annual income tax return. Homeowners must complete and submit Form HTC-1 to the SDAT. The application deadline is October 1. The application requires detailed information about household income from all sources for the prior calendar year.

Maryland Estate and Inheritance Tax

Maryland is one of the few states to impose both an estate tax and an inheritance tax. The two taxes are separate and apply in different ways. The Maryland estate tax is levied on the total value of the decedent’s estate before it is distributed to any heirs.

The Maryland estate tax exemption is $5 million per person. For estates that exceed this exemption, the tax is calculated on the overage.

The inheritance tax is paid by the person who receives the property, known as the beneficiary. The rate of the inheritance tax depends on the beneficiary’s relationship to the decedent. Direct relatives, such as a spouse, children, grandchildren, parents, and siblings, are completely exempt from the inheritance tax. For other beneficiaries, such as nieces, nephews, cousins, and friends, the inheritance tax is levied at a rate of 10% on the value of the property they receive.