Maryland Tax on Military Retirement Income
Military retirees can reduce their Maryland state tax liability. This guide clarifies the specific income subtractions available and the process for applying them.
Maryland offers a tax subtraction for military retirees, reducing their state income tax liability. This benefit recognizes military service by allowing a portion of retirement income to be excluded from state taxation. The process involves specific forms and calculations that impact the final tax owed to the state.
Maryland’s Military Retirement Income Exemption
Maryland provides a subtraction modification for military retirement income, with the amount dependent on the retiree’s age. For the 2023 tax year, individuals under the age of 55 can subtract up to $12,500 of their military retirement income. Those who are 55 or older are eligible for a higher subtraction, up to $20,000. This subtraction reduces a retiree’s Maryland adjusted gross income, which is the figure used to calculate state and local income tax.
The income eligible for this benefit is defined as retirement income received from military service. This includes payments from the Defense Finance and Accounting Service (DFAS) reported on Form 1099-R. It also extends to survivor benefits paid to a spouse or other beneficiary of a deceased military member. The origin of the payments must be from service in the armed forces, including reserve components and the National Guard.
Required Information and Forms to Claim the Exemption
The primary document needed is the Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. You will receive this form from the Defense Finance and Accounting Service (DFAS), and it details the total amount of military retirement pay you received during the tax year. This form contains the gross distribution amount that serves as the starting point for your calculation.
The calculation is performed on Maryland Form 502SU, Subtractions from Income. You will use the information from your Form 1099-R to complete line u of Form 502SU. The form and its instructions are available for download on the Comptroller of Maryland website.
On Form 502SU, you will enter the amount of your taxable military retirement income, up to the maximum allowed for your age group. For example, if you are 60 years old and received $50,000 in military retirement pay, you would enter $20,000 on the appropriate line.
How to Claim the Exemption on Your Tax Return
Once you have completed Form 502SU, transfer this figure to your main Maryland tax return. The total subtractions from Form 502SU are entered on line 13 of the Maryland Resident Income Tax Return, Form 502.
Filing Form 502SU is a required attachment to your tax return. Failure to attach Form 502SU can result in the disallowance of your subtractions and a recalculation of your tax, which could lead to a higher tax bill and potential penalties.
Whether you file your taxes electronically or by mail, the process is the same. Tax software will automatically generate and attach Form 502SU based on the information you enter about your military retirement income. If filing by paper, you must physically attach the completed Form 502SU behind your Form 502 before mailing it.
Interaction with Maryland’s Standard Pension Exclusion
Maryland offers a separate general pension exclusion that should not be confused with the military-specific benefit. This standard exclusion is available to all residents who are age 65 or older, or who are totally and permanently disabled (or whose spouse is). For the 2024 tax year, this exclusion allows eligible individuals to subtract up to $39,500 of their taxable pension and retirement annuity income. However, income from an IRA does not qualify for this particular subtraction.
A military retiree cannot apply both the military retirement subtraction and the standard pension exclusion to the same income. For instance, a 68-year-old military retiree cannot subtract $20,000 using the military rule and then another $39,500 from the same military pension income using the standard pension exclusion.
However, an eligible military retiree can use both subtractions on different sources of income. For example, a retiree over age 65 could apply the military retirement subtraction to their military pension from DFAS. If they also receive retirement income from a separate, non-military source, such as a civilian 401(k) or a private-sector pension, they could then apply the standard pension exclusion to that income, up to its own limit.