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Maryland Retirement Tax Friendliness

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Overview of Maryland Retirement Tax Friendliness

Maryland exempts some types of retirement income, including Social Security, from state income taxes but fully taxes others, such as income from an IRA or 401(k). Maryland is one of just two states that has both an estate and an inheritance tax.

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You will pay of Maryland state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, your marginal state tax rate is %.
Public pension income is taxed, private pension income is taxed.
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    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Maryland Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

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 alpine 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 some types of retirement income, including Social Security, but fully taxes others, such as income from an IRA or 401(k). Likewise, some retirees may be discouraged by the state’s inheritance and estate taxes. In fact, it is one of just two states that has both.

Is Maryland tax-friendly for retirees?

That largely depends on where your retirement income is coming from and how you are spending it, so we’ll call it: 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 income in excess of $30,000 per 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. (Though the state is in the process of increasing its estate tax exemption to match the federal exemption.)

Is Social Security taxable in Maryland?

Nope. 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?

Yes. Income from any non-public pension is fully taxed. Income from retirement savings accounts and public pensions is taxed, but taxpayers over the age of 64 can claim a deduction against it. The deduction is $29,000 less any Social Security benefits.

If, for example, you received $19,000 in Social Security last year, you would be able to deduct $10,000 against income from a public pension, IRA or other type of retirement savings account. If you had $20,000 in income from you IRA, $10,000 would be subject to tax as part of your taxable income. The table below shows tax rates and brackets for the Maryland income tax.

Income Tax Brackets

Single Filers
Maryland Taxable IncomeRate
$0 - $1,0002.00%
$1,000 - $2,0003.00%
$2,000 - $3,0004.00%
$3,000 - $100,0004.75%
$100,000 - $125,0005.00%
$125,000 - $150,0005.25%
$150,000 - $250,0005.50%
$250,000+5.75%
Married, Filing Jointly
Maryland Taxable IncomeRate
$0 - $1,0002.00%
$1,000 - $2,0003.00%
$2,000 - $3,0004.00%
$3,000 - $150,0004.75%
$150,000 - $175,0005.00%
$175,000 - $225,0005.25%
$225,000 - $300,0005.50%
$300,000+5.75%
Married, Filing Separately
Maryland Taxable IncomeRate
$0 - $1,0002.00%
$1,000 - $2,0003.00%
$2,000 - $3,0004.00%
$3,000 - $100,0004.75%
$100,000 - $125,0005.00%
$125,000 - $150,0005.25%
$150,000 - $250,0005.50%
$250,000+5.75%
Head of Household
Maryland Taxable IncomeRate
$0 - $1,0002.00%
$1,000 - $2,0003.00%
$2,000 - $3,0004.00%
$3,000 - $150,0004.75%
$150,000 - $175,0005.00%
$175,000 - $225,0005.25%
$225,000 - $300,0005.50%
$300,000+5.75%

How high are property taxes in Maryland?

Maryland property tax rates are close to average, although taxes paid can be very expensive because of the state’s high home values. The average effective property tax rate in the state is 1.04%.

However, many Maryland homeowners pay at least $3,000 in property taxes per year because the state’s median home value is close to $300,000. Overall, typical housing costs in Maryland are 75% higher than the national average.

What is the Maryland homestead exemption?

The Maryland homestead exemption is available to all Marylanders (including seniors) who own and occupy their home. It limits annual increases in assessed property value to 10%. The exemption 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 be $30,000. 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.

Photo credit: ©iStock.com/John M. Chase

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%. That is about 1% lower than the national average.

What other Maryland taxes should I be concerned about?

The Maryland estate and inheritance tax do not affect many people, but if you are planning your estate it is a good idea to be familiar with them. The 2015 estate tax exemption is $1.5 million, less than one-third the federal exemption.

That will increase to $2 million in 2016, $3 million in 2017, $4 million in 2018 and $5.9 million (equal to the federal exemption) in 2019. Estates in excess of the exemption are generally taxed at a rate of about 10%.

In addition to that estate tax, Maryland also collects an inheritance tax. Most direct relatives are exempt from this tax. This includes children and other direct descendants, spouses, parents, siblings and stepchildren. Non-relatives and distant relatives who receive inheritance are taxed at a rate of 10%.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration