Overview of Maryland Retirement Tax Friendliness
Maryland exempts Social Security from state income taxes and provides an exclusion for other types of retirement income, including pension payments and 401(k) withdrawals. However, it fully taxes other types of income, such as withdrawals from an IRA. Maryland is the only state in the country with both an estate and an inheritance tax.
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Maryland Retirement Taxes
The state of Maryland stretches from the Atlantic coast across the Chesapeake Bay to the Appalachian Mountains. Its diverse landscape yields a wide variety of recreational opportunities for retirees who are so inclined, from hiking to sailing.
Meanwhile, those who would rather stay off their feet can do so while enjoying some of the state’s legendary seafood offerings, such as blue crab, the state crustacean, and rockfish, the state fish.
And what about the state’s taxes? Much like seafood, while some retirees will find the state’s tax system to their liking, others won’t. That’s because the state exempts Social Security, but fully taxes others, such as income from an IRA. Likewise, some retirees may be discouraged by the state’s inheritance and estate taxes. In fact, it is the only state in the country with both.
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Is Maryland tax-friendly for retirees?
The answer to this questions depends largely on where your retirement income is coming from and how you are spending it. So we’ll call Maryland moderately tax-friendly for retirees.
Seniors whose primary source of income is Social Security will have a very small tax bill in Maryland, as the Free State does not tax Social Security benefits. On the other hand, retirees who rely on some combination of Social Security, retirement account income and public pension income may have a larger tax bill, especially if they have retirement income from a 401(k) or similar account in excess of $36,300 for the 2023 tax year.
Lastly, seniors for whom estate planning and leaving behind a legacy for their loved ones is a high priority may find Maryland’s estate and inheritance taxes quite punitive.
Is Social Security taxable in Maryland?
Maryland exempts all Social Security retirement benefits from taxation. Taxpayers who pay federal taxes on Social Security can subtract the taxed benefits out of their taxable income on their Maryland tax return.
Are other forms of retirement income taxable in Maryland?
Income from an IRA is fully taxed. Income from public pensions and private employee retirement plans is taxed, but taxpayers ages 65 and older can claim a deduction against it. The deduction is $36,200 for tax year 2023.
How high are property taxes in Maryland?
Maryland property tax rates are close to national median (1.01%), although taxes paid can be very expensive because of the state’s higher home values. The average effective property tax rate in the state is 1.07%.
However, a typical Maryland homeowner pays around $3,633 in property taxes per year, as the state’s median home value is $338,500 (11th highest).
What is the Maryland homestead tax credit?
The Maryland homestead tax credit is available to all Marylanders (including seniors) who own and occupy their home. It limits annual increases in assessed property value to 10%, meaning the credit is equal to any increase in excess of 10%.
For example, if your home was previously assessed at $200,000 and is reassessed at $250,000, the credit would offset the taxes owed on the $30,000 in additional assessed value. The 10% limit would put the highest allowed value at $220,000, so all assessed value above that amount would be negated by the credit.
How high are sales taxes in Maryland?
The state sales tax rate in Maryland is 6%. There are no city or county sales taxes. That means the highest and lowest rate you can pay in Maryland is 6%.
What other Maryland taxes should I be concerned about?
The Maryland estate and inheritance taxes do not affect everyone, but if you're planning your estate, it's a good idea to be familiar with them. The current estate tax exemption is $5 million, a little less than a third of the federal exemption. Estates that exceed the $5 million state exemption are subject to tax rates that can reach up to 16%.
In addition to an estate tax, Maryland also collects an inheritance tax, making it the only state that levies both. Most direct relatives are exempt from this tax, including children and other direct descendants, spouses, parents, siblings and stepchildren. Non-relatives and distant relatives who receive an inheritance are taxed at a rate of 10%.
