Maryland Income Tax for Retirees

[ezpath]

I was preparing a reply to another thread that mentioned Maryland taxes, but that thread is now locked.

I thought it might still be worthwhile to share a few points about the retiree tax situation in Maryland…

I have personally found the tax situation good for retirees (thus far) in Maryland—and improving. For those with higher amounts of tax deferred wealth the situation may be less advantageous.

Last year Maryland started providing a $1750 (MFJ) tax credit for seniors (age 65 and above)—bottom line as if you had paid the $1750 as state income tax. Maryland provides a pension income exclusion of up to $36,200 per person, $72,400 MFJ. Of note, withdrawals from 401Ks and 403Bs qualify, IRAs do not.

In my experience, the five years 65-69 can be nearly tax optimal in Maryland—in particular for those delaying claiming Soc Sec until 70. DW and I have delayed until 70.

Case in point, last year DW and my Maryland tax return was (rounded) 105K from Fed. Of that 94K was qualified pension (mostly 403B distributions). Our total state and county income tax in Maryland was $650. This was based on just standard deductions and the senior tax credit. Namely, 72400 pension exclusion, 8400 exemptions, 4800 standard deductions, and the 1750 tax credit.

Maryland doesn’t tax social security income. Unfortunately, the social security income is bucketed along with pension income for the pension exclusion. So, for those with a higher amount of social security income there may not be any room left for pension exclusion.

For us, both delaying social security, the past 5 years (ages 65-69) were quite acceptable for Maryland tax. Next year we’ll both have full social security income…things won’t be quite as good, but in my planning, I think it will be acceptable.

[Makefile]

That is correct, however, things deteriorate quickly over $100,000 federal AGI single / $150,000 federal AGI married filing jointly.

That senior tax credit of $1,000 single or $1,750 married uses those thresholds as a hard cutoff. Go from $149,999 to $150,000 married and it costs you $1,750. It requires managing income in a similar way to IRMAA.

There is also a personal exemption phaseout that kicks in over those income levels.

And the thresholds are not adjusted for inflation.

The state also allowed counties to impose progressive county income taxes a few years back rather than a flat rate, and Frederick Co apparently interpreted that not as a progressive schedule but as a set of thresholds that apply that bracket rate to your entire income (i.e., the way an uniformed person says they don't want to work overtime because it might put them in a higher tax bracket, is actually correct in this case).

[grabiner]

Thanks for this note; I updated the State Income Taxes page on the wiki. As with some other provisions in MD taxes such as the personal exemptions, this uses federal AGI, so income from Treasury bonds can disqualify you from the credit, but income from out-of-state municipal bonds cannot.

[Makefile]

Thanks for this note; I updated the State Income Taxes page on the wiki. As with some other provisions in MD taxes such as the personal exemptions, this uses federal AGI, so income from Treasury bonds can disqualify you from the credit, but income from out-of-state municipal bonds cannot.

There is a subtraction code HH to true-up the personal exemptions if you were denied a portion of your personal exemption only because of US government interest. But there is no such adjustment for the senior tax credit.

[Claudia Whitten]

Last year Maryland started providing a $1750 (MFJ) tax credit for seniors (age 65 and above)—bottom line as if you had paid the $1750 as state income tax. Maryland provides a pension income exclusion of up to $36,200 per person, $72,400 MFJ. Of note, withdrawals from 401Ks and 403Bs qualify, IRAs do not.

In my experience, the five years 65-69 can be nearly tax optimal in Maryland—in particular for those delaying claiming Soc Sec until 70. DW and I have delayed until 70.

Case in point, last year DW and my Maryland tax return was (rounded) 105K from Fed. Of that 94K was qualified pension (mostly 403B distributions). Our total state and county income tax in Maryland was $650. This was based on just standard deductions and the senior tax credit. Namely, 72400 pension exclusion, 8400 exemptions, 4800 standard deductions, and the 1750 tax credit.

Maryland doesn’t tax social security income. Unfortunately, the social security income is bucketed along with pension income for the pension exclusion. So, for those with a higher amount of social security income there may not be any room left for pension exclusion.

For us, both delaying social security, the past 5 years (ages 65-69) were quite acceptable for Maryland tax. Next year we’ll both have full social security income…things won’t be quite as good, but in my planning, I think it will be acceptable.

Excellent information. Thanks.

[Swee'pea]

....
Maryland provides a pension income exclusion of up to $36,200 per person, $72,400 MFJ. Of note, withdrawals from 401Ks and 403Bs qualify, IRAs do not.
...

Just wanted to add that the maximum Maryland pension income exclusion is $39,500 per person (age 65+) for 2024.

[minesweep]

Maryland is the only state in the country that levies both an inheritance tax and estate tax.

State estate and inheritance taxes

[Makefile]

Maryland is the only state in the country that levies both an inheritance tax and estate tax.

State estate and inheritance taxes

That is correct, although inheritance tax paid is a credit against the estate tax (so the estate would pay the larger of the two taxes, not both) and the inheritance tax is somewhat de-fanged compared to Pennsylvania for example, by exempting many (but not all) kinds of relatives.

[jebmke]

Thanks for this note; I updated the State Income Taxes page on the wiki. As with some other provisions in MD taxes such as the personal exemptions, this uses federal AGI, so income from Treasury bonds can disqualify you from the credit, but income from out-of-state municipal bonds cannot.

Ah, but you may still qualify for the dead deer credit

[Wanderingwheelz]

If any Marylanders want to head east to put some fliers under windshield wipers singing the praises of retirement in Maryland that would be greatly appreciated.

Hint: Start at Pelican Square in Lewes (Marshall’s, Petco & ACME), then head south to Lighthouse Plaza (TJ Maxx, SuperG & Aldi).

Lunch is on me.

[furiouschads]

I found out about the exclusion that applies to 401k withdrawals (under a ceiling) but not IRA withdrawals. I don't see the sense in that. What is the difference between withdrawals from a 401k or an IRA? MD has a number of odd tax provisions. This is one of them.

I was able to move funds from an IRA back into a 401k to qualify for this exclusion. It will work for us until SS kicks in when we turn 70.

[Makefile]

I found out about the exclusion that applies to 401k withdrawals (under a ceiling) but not IRA withdrawals. I don't see the sense in that. What is the difference between withdrawals from a 401k or an IRA? MD has a number of odd tax provisions. This is one of them.

I was able to move funds from an IRA back into a 401k to qualify for this exclusion. It will work for us until SS kicks in when we turn 70.

Here is a write-up about the rationale: https://mgaleg.maryland.gov/2000rs/fnot ... sb0401.PDF

Basically, the pension exclusion dates to 1968, before ERISA, IRAs, or 401(k)s existed. It used the phrase "employee retirement system." There was confusion over what that meant for all the new kinds of plans that didn't exist in 1968, so in 2000, they clarified it, and explicitly excluded IRAs at that time. There have been periodic attempts to include (at least) rollover IRAs, but the last movement on this was the 502R form added for 2017 so that better data could be collected on how much it would reduce revenues.

I agree that it doesn't seem the legislators or fiscal note people have contemplated the fact that it's increasingly common to be able to put rollover and even contributory IRAs back into an "employee retirement system" and qualify for the exclusion. It also looks like delaying Social Security past age 65 was not a thing before 1972, so in 1968 they did not even consider that anyone would opportunistically delay Social Security so as to fill up their pension exclusion with other would-be taxable income.

[furiouschads]

I found out about the exclusion that applies to 401k withdrawals (under a ceiling) but not IRA withdrawals. I don't see the sense in that. What is the difference between withdrawals from a 401k or an IRA? MD has a number of odd tax provisions. This is one of them.

I was able to move funds from an IRA back into a 401k to qualify for this exclusion. It will work for us until SS kicks in when we turn 70.

Here is a write-up about the rationale: https://mgaleg.maryland.gov/2000rs/fnot ... sb0401.PDF

Basically, the pension exclusion dates to 1968, before ERISA, IRAs, or 401(k)s existed. It used the phrase "employee retirement system." There was confusion over what that meant for all the new kinds of plans that didn't exist in 1968, so in 2000, they clarified it, and explicitly excluded IRAs at that time. There have been periodic attempts to include (at least) rollover IRAs, but the last movement on this was the 502R form added for 2017 so that better data could be collected on how much it would reduce revenues.

I agree that it doesn't seem the legislators or fiscal note people have contemplated the fact that it's increasingly common to be able to put rollover and even contributory IRAs back into an "employee retirement system" and qualify for the exclusion. It also looks like delaying Social Security past age 65 was not a thing before 1972, so in 1968 they did not even consider that anyone would opportunistically delay Social Security so as to fill up their pension exclusion with other would-be taxable income.

Thank you for the writeup! Looks like they fixed it to include federal retirees who at that time were not in the Social Security system. I'll send a message to my reps asking them to modify the language to work better for all retirees who delay taking Social Security.

[jebmke]

I found out about the exclusion that applies to 401k withdrawals (under a ceiling) but not IRA withdrawals. I don't see the sense in that. What is the difference between withdrawals from a 401k or an IRA? MD has a number of odd tax provisions. This is one of them.

I was able to move funds from an IRA back into a 401k to qualify for this exclusion. It will work for us until SS kicks in when we turn 70.

Here is a write-up about the rationale: https://mgaleg.maryland.gov/2000rs/fnot ... sb0401.PDF

Basically, the pension exclusion dates to 1968, before ERISA, IRAs, or 401(k)s existed. It used the phrase "employee retirement system." There was confusion over what that meant for all the new kinds of plans that didn't exist in 1968, so in 2000, they clarified it, and explicitly excluded IRAs at that time. There have been periodic attempts to include (at least) rollover IRAs, but the last movement on this was the 502R form added for 2017 so that better data could be collected on how much it would reduce revenues.

I agree that it doesn't seem the legislators or fiscal note people have contemplated the fact that it's increasingly common to be able to put rollover and even contributory IRAs back into an "employee retirement system" and qualify for the exclusion. It also looks like delaying Social Security past age 65 was not a thing before 1972, so in 1968 they did not even consider that anyone would opportunistically delay Social Security so as to fill up their pension exclusion with other would-be taxable income.

Thank you for the writeup! Looks like they fixed it to include federal retirees who at that time were not in the Social Security system. I'll send a message to my reps asking them to modify the language to work better for all retirees who delay taking Social Security.

While you are at it, ask them to explain in simple words how the two-income subtraction works. If they can't explain it in 1-2 minutes they don't get to keep their jobs.

[walkindude]

That is correct, however, things deteriorate quickly over $100,000 federal AGI single / $150,000 federal AGI married filing jointly.

That senior tax credit of $1,000 single or $1,750 married uses those thresholds as a hard cutoff. Go from $149,999 to $150,000 married and it costs you $1,750. It requires managing income in a similar way to IRMAA.

There is also a personal exemption phaseout that kicks in over those income levels.

And the thresholds are not adjusted for inflation.

The state also allowed counties to impose progressive county income taxes a few years back rather than a flat rate, and Frederick Co apparently interpreted that not as a progressive schedule but as a set of thresholds that apply that bracket rate to your entire income (i.e., the way an uniformed person says they don't want to work overtime because it might put them in a higher tax bracket, is actually correct in this case).

+1

I moved some of my SEP IRA to a solo 401k (less than $250k [5 years x $35k/year between 65 and 70 = $175k total] to avoid having to file Form 5500) to take advantage of the pension exclusion and am also doing Roth conversions up to $150k, and no further to avoid the cliff for the senior tax credit. The treasury advice in another post is also something that nearly got me over the cliff, but I still just made it under. Ahhh, the details!

[Makefile]

While you are at it, ask them to explain in simple words how the two-income subtraction works. If they can't explain it in 1-2 minutes they don't get to keep their jobs.

Isn't that modeled after a deduction that was in the federal tax code but was taken out in the 1986 reform?

[Walkure]

While you are at it, ask them to explain in simple words how the two-income subtraction works. If they can't explain it in 1-2 minutes they don't get to keep their jobs.

Isn't that modeled after a deduction that was in the federal tax code but was taken out in the 1986 reform?

I don't know why people make this out to be so complicated. It looks incredibly basic. If both spouses work, you get an additional deduction of $1200 or the adjusted income of lower earning spouse, whichever is lower. Basically, if you both make at least $1200 you will always get the full deduction. Since like every other stupid cliff in the MD tax code the $1200 is not indexed to inflation, the worksheet becomes less relevant every year.

[Makefile]

While you are at it, ask them to explain in simple words how the two-income subtraction works. If they can't explain it in 1-2 minutes they don't get to keep their jobs.

Isn't that modeled after a deduction that was in the federal tax code but was taken out in the 1986 reform?

I don't know why people make this out to be so complicated. It looks incredibly basic. If both spouses work, you get an additional deduction of $1200 or the adjusted income of lower earning spouse, whichever is lower. Basically, if you both make at least $1200 you will always get the full deduction. Since like every other stupid cliff in the MD tax code the $1200 is not indexed to inflation, the worksheet becomes less relevant every year.

They don't even need to both work--the booklet says adjusted gross income, so as long as both spouse has at least $1200 in investment or pension income you would take it.

[Walkure]

While you are at it, ask them to explain in simple words how the two-income subtraction works. If they can't explain it in 1-2 minutes they don't get to keep their jobs.

Isn't that modeled after a deduction that was in the federal tax code but was taken out in the 1986 reform?

I don't know why people make this out to be so complicated. It looks incredibly basic. If both spouses work, you get an additional deduction of $1200 or the adjusted income of lower earning spouse, whichever is lower. Basically, if you both make at least $1200 you will always get the full deduction. Since like every other stupid cliff in the MD tax code the $1200 is not indexed to inflation, the worksheet becomes less relevant every year.

They don't even need to both work--the booklet says adjusted gross income, so as long as both spouse has at least $1200 in investment or pension income you would take it.

Fair enough. It's probably beyond this forum's policy to speculate as to why the two-income subtraction exists as a matter of policy, but the actual mechanical application of it is quite straightforward.

[Makefile]

Fair enough. It's probably beyond this forum's policy to speculate as to why the two-income subtraction exists as a matter of policy, but the actual mechanical application of it is quite straightforward.

Don't think it's a controversial point - for incomes up to $100,000, the tax brackets for singles and married filing jointly are exactly the same (a marriage penalty), so the two-income subtraction offsets that somewhat. Except it's likely set back in the 1970s or so when $1200 was good money.

[WhitePuma]

Thanks for this note; I updated the State Income Taxes page on the wiki

This wiki page is great, thanks for keeping it updated!
I noticed it doesn’t have a call-out section for Oregon, a state which presents some unique challenges for those with high incomes and/or large tax-deferred accounts. Any chance the page can be updated with key considerations applicable to Oregon?

[grabiner]

Thanks for this note; I updated the State Income Taxes page on the wiki

This wiki page is great, thanks for keeping it updated!
I noticed it doesn’t have a call-out section for Oregon, a state which presents some unique challenges for those with high incomes and/or large tax-deferred accounts. Any chance the page can be updated with key considerations applicable to Oregon?

If there is a wiki editor familiar with Oregon taxes, they can add a section. Alternatively, you can PM me with a summary that I can add.

David

[LadyGeek]

If there is a wiki editor familiar with Oregon taxes, they can add a section. Alternatively, you can PM me with a summary that I can add.

Sorry, I'm not familiar with this. However, I posted a link to this post in Re: Suggestions for the Wiki.

[furiouschads]

I found out about the exclusion that applies to 401k withdrawals (under a ceiling) but not IRA withdrawals. I don't see the sense in that. What is the difference between withdrawals from a 401k or an IRA? MD has a number of odd tax provisions. This is one of them.

I was able to move funds from an IRA back into a 401k to qualify for this exclusion. It will work for us until SS kicks in when we turn 70.

Here is a write-up about the rationale: https://mgaleg.maryland.gov/2000rs/fnot ... sb0401.PDF

Basically, the pension exclusion dates to 1968, before ERISA, IRAs, or 401(k)s existed. It used the phrase "employee retirement system." There was confusion over what that meant for all the new kinds of plans that didn't exist in 1968, so in 2000, they clarified it, and explicitly excluded IRAs at that time. There have been periodic attempts to include (at least) rollover IRAs, but the last movement on this was the 502R form added for 2017 so that better data could be collected on how much it would reduce revenues.

I agree that it doesn't seem the legislators or fiscal note people have contemplated the fact that it's increasingly common to be able to put rollover and even contributory IRAs back into an "employee retirement system" and qualify for the exclusion. It also looks like delaying Social Security past age 65 was not a thing before 1972, so in 1968 they did not even consider that anyone would opportunistically delay Social Security so as to fill up their pension exclusion with other would-be taxable income.

Thank you for mentioning Form 502R.

It appears that this form was created, as you said, precisely to gather the information needed to do a fiscal analysis of possible changes to the pension exclusion. HB1148 was passed in the 2016 session, mandating the collection of this information. Here is the pertinent fiscal and policy note: https://mgaleg.maryland.gov/2016RS/fnot ... hb1148.pdf

[rich126]

Thanks for this note; I updated the State Income Taxes page on the wiki. As with some other provisions in MD taxes such as the personal exemptions, this uses federal AGI, so income from Treasury bonds can disqualify you from the credit, but income from out-of-state municipal bonds cannot.

I took a glance at that web page and I'm not sure who all maintains it, but Arizona since 2023 has gone to a flat 2.5% tax.
https://news.nau.edu/what-is-arizonas-n ... n-for-you/

[grabiner]

Thanks for this note; I updated the State Income Taxes page on the wiki. As with some other provisions in MD taxes such as the personal exemptions, this uses federal AGI, so income from Treasury bonds can disqualify you from the credit, but income from out-of-state municipal bonds cannot.

I took a glance at that web page and I'm not sure who all maintains it, but Arizona since 2023 has gone to a flat 2.5% tax.
https://news.nau.edu/what-is-arizonas-n ... n-for-you/

The tax rate changing is not something that is normally tracked on that wiki page, but I checked and found a few other updates.

[JBTX]

Thanks for this note; I updated the State Income Taxes page on the wiki

This wiki page is great, thanks for keeping it updated!
I noticed it doesn’t have a call-out section for Oregon, a state which presents some unique challenges for those with high incomes and/or large tax-deferred accounts. Any chance the page can be updated with key considerations applicable to Oregon?

Thanks for this note; I updated the State Income Taxes page on the wiki

This wiki page is great, thanks for keeping it updated!
I noticed it doesn’t have a call-out section for Oregon, a state which presents some unique challenges for those with high incomes and/or large tax-deferred accounts. Any chance the page can be updated with key considerations applicable to Oregon?

If there is a wiki editor familiar with Oregon taxes, they can add a section. Alternatively, you can PM me with a summary that I can add.

David

I put a blurb in there for Oregon, based upon a few links I found. I don’t have any particular personal expertise in Oregon taxes. Please review and let me know.

[joe3n]

What happens in Maryland if only 1 spouse gets a pension and the other has no income, but you are Married Filing Jointly? Is the total pension deduction $72,400 or $36,200?

Thanks

[Asyouwish]

What happens in Maryland if only 1 spouse gets a pension and the other has no income, but you are Married Filing Jointly? Is the total pension deduction $72,400 or $36,200?

Thanks

It’s per person. Separately. Here’s the worksheet. https://www.marylandtaxes.gov/forms/wor ... ksheet.pdf

[joe3n]

What happens in Maryland if only 1 spouse gets a pension and the other has no income, but you are Married Filing Jointly? Is the total pension deduction $72,400 or $36,200?

Thanks

It’s per person. Separately. Here’s the worksheet. https://www.marylandtaxes.gov/forms/wor ... ksheet.pdf

So that means that it would only be $36,200 as an exclusion on a MFJ return?

[jebmke]

Correct, only one exclusion per person

[Asyouwish]

The worksheet has two columns. One for you and one for spouse. If the spouse has zero incime, the exclusion is zero. That’s leaves the exclusion only for you.

[Careful]

Thanks for this thread. I had no idea that withdrawals from a 401k/403b would be considered tax-exempt pension income!