Maryland’s Military Tax Exemptions Explained

Maryland provides tax advantages for both active duty and retired military personnel. These state-level benefits can reduce the amount of income subject to Maryland’s income tax. Utilizing these exemptions requires understanding state-specific rules regarding residency and the different types of military income.

Determining Your Residency Status for Tax Purposes

Your residency status is the primary factor in how Maryland taxes your income. If your legal residence, or domicile, is in Maryland, you are considered a Maryland resident for tax purposes. This means you are required to file a Maryland resident income tax return (Form 502) and report all income, including your military pay, regardless of where you were stationed during the year.

For service members who are not Maryland residents but are stationed in the state under military orders, the tax situation is different. Under federal law, your active duty military pay is not taxable by Maryland. You would only owe Maryland income tax on any non-military income earned within the state.

The Military Spouses Residency Relief Act (MSRRA) provides specific relief for military spouses. If you are the civilian spouse of a service member and you move to Maryland to be with your spouse who is stationed there on military orders, you may be able to keep your prior state of legal residence for tax purposes. To qualify, you must have the same state of domicile as the service member and have moved to Maryland solely to be with them.

If a service member and their spouse have different states of domicile, they should generally file separate Maryland returns, even if they file a joint federal return. This approach ensures that each person’s income is attributed correctly based on their individual residency status.

Tax Exemption for Military Pay

Maryland offers a specific income tax subtraction for resident service members who receive military pay while serving abroad. You may be able to subtract up to $15,000 of military pay from your Maryland income if that pay was earned for service performed outside the boundaries of the United States.

To be eligible for this subtraction, your total military pay for the year must be less than $30,000. If your total military income is $30,000 or more, you cannot claim this particular subtraction. The subtraction applies to pay received from active components of the armed forces as well as reserve components.

For the purpose of this exemption, “military pay” includes salary, wages, and other compensation for active service in the U.S. Armed Forces. The key factor for this exemption is that the service was performed outside of U.S. boundaries or possessions.

Tax Exemption for Military Retirement Income

Retired military members in Maryland are eligible for a significant subtraction on their retirement income. The state provides a two-tiered system for this tax benefit, with the amount of the exemption depending on the retiree’s age. This applies to retirement income received from an active or reserve component of the U.S. Armed Forces.

If you are a military retiree under the age of 55, you can subtract up to $12,500 of your military retirement income. For retirees aged 55 and older, the maximum subtraction for military retirement income is $20,000.

This exemption covers more than just standard retirement pay. It also applies to payments received from a Survivor Benefit Plan (SBP), allowing surviving spouses to also benefit from this tax subtraction. The income must be included in your federal adjusted gross income to be eligible for the subtraction on your Maryland return.

How to Claim the Maryland Military Tax Exemptions

To claim a military-related tax exemption, you must complete and file specific Maryland tax forms. The primary forms involved are the Maryland Resident Income Tax Return (Form 502) and the Subtractions from Income schedule (Form 502SU). These forms work together to calculate your final Maryland tax liability after accounting for any subtractions you are eligible for.

The process begins with Form 502SU, where you will report your subtractions. On this form, you will find a list of subtraction modification codes. For the exemption on military pay earned overseas, use code ‘m’. For military retirement income, use code ‘u’. You will enter the appropriate code and the amount of the exempt income in the designated section of Form 502SU.

After completing Form 502SU and calculating your total subtractions, you will transfer that total to the designated line on your main Form 502. This amount reduces your federal adjusted gross income to arrive at your Maryland adjusted gross income, which is the figure used to calculate your state and local tax. It is important to follow the form instructions carefully and attach Form 502SU to your Form 502 when you file.