Maryland taxes for early retirees: two death taxes, a county tax, and an IRA-shaped hole

By Tom, CPA · Updated October 29, 2026

TL;DR: Maryland taxes income at state rates up to 6.5% plus a county rate up to 3.30%. Social Security is exempt. A 65+ pension exclusion covers 401(k)s but not IRAs, and Maryland has both an estate and an inheritance tax.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Maryland is the overachiever of state taxes: it has a state income tax, a county income tax, an estate tax and an inheritance tax. It's the only state with both death taxes, which is a fun fact nobody wants to learn at a funeral. In 2025 it also added two new brackets at the top and a 2% surtax on capital gains for high earners.

For retirees, Maryland softens things a little: Social Security is exempt, and people 65+ get a pension exclusion. But that exclusion skips IRAs entirely and shrinks with Social Security. Frugal Fran calls Maryland "crab cakes with a cover charge." Lavish Larry orders extra crab cakes.

CPA Warning Label: Rolling a 401(k) into an IRA can make it ineligible for Maryland's pension exclusion, which only covers employer plans.

State brackets after the 2025 changes

Maryland's state brackets aren't indexed for inflation. Starting with tax year 2025, the Comptroller lists these rates (they apply for 2026 too unless the law changes again):

For joint filers, tax on the first $3,000 is $90; tax at $150,000 is $7,072.50. Then add the local income tax, which every county and Baltimore City levies on the same Maryland taxable income. Local rates run from 2.25% to 3.30%, and 3.30% is the maximum from 2026. So a typical Marylander pays 7% to 8% on the margin. Not cheap.

The 2025 law also made other changes, per the Comptroller's tax alert: a flat standard deduction of $3,350 single and $6,700 joint, indexed for inflation; a phase-down of itemized deductions by 7.5% of federal AGI over $200,000; and an additional 2% tax on net capital gains for taxpayers with federal AGI over $350,000, with some exceptions such as certain home sales and retirement accounts.

Personal exemptions are $3,200 each, plus $1,000 for each taxpayer 65 or older. They phase out at higher incomes; for joint filers the full exemption applies up to $150,000 of federal AGI and phases to zero above $200,000.

Retirement income: the pension exclusion and its fine print

The Comptroller says taxpayers who are 65 or older, or totally disabled (or whose spouse is), can exclude pension income up to $41,200 for 2025 and $40,600 for 2026. Each eligible spouse figures their own exclusion. The fine print:

• Qualifying plans: employer retirement plans, including 401(k), 403(b) and 457(b) distributions and defined benefit pensions.
• Not qualifying: IRAs, Roth IRAs, SEPs and Keogh plans. If you rolled your 401(k) into an IRA, you may have just made it ineligible. Read that sentence again.
• Social Security reduces it. The cap is cut by all Social Security and Railroad Retirement benefits received by the person claiming the exclusion, taxable or not.

Social Security itself is fully exempt: Maryland subtracts the federally taxable portion. Military retirees get a separate subtraction of up to $12,500, or $20,000 at 55 and older; check the current instructions.

Capital gains, dividends and interest are taxed as ordinary income, plus the 2% surtax if your federal AGI is over $350,000.

Illustration: 401(k) vs. IRA in Maryland

Illustration (2026, using the 2025 rate schedule and a hypothetical 3.20% county rate): Larry and his wife are both 66 and file jointly. Larry takes $60,000 from his 401(k) and gets $30,000 of Social Security; his wife gets $20,000 of Social Security. Larry's exclusion is the smaller of $60,000 or $40,600 minus his $30,000 of Social Security, so $10,600. Social Security is subtracted. Maryland taxable income is $60,000 minus $10,600, minus the $6,700 standard deduction, minus $8,400 of exemptions ($3,200 each plus $1,000 each for age), or $34,300. State tax is $90 plus 4.75% of $31,300, or $1,576.75. County tax at 3.20% is $1,097.60. Total: $2,674.35.

Same couple, but the $60,000 comes from an IRA. No exclusion. Taxable income is $44,900. State tax is $90 plus 4.75% of $41,900, or $2,080.25; county tax is $1,436.80; total $3,517.05. The IRA version costs $842.70 more each year. That's a lot of crab cakes.

Moral: if you're heading to Maryland and your 401(k) plan is decent, think twice before rolling it to an IRA. And if Social Security is large, the exclusion may disappear anyway.

Planning moves for Maryland retirees

Maryland's rules reward some specific choices:

1. Keep money in the 401(k) if the plan is good. Employer plan distributions can use the 65+ exclusion; IRA distributions can't. Leaving funds in a low-cost 401(k) or 403(b) until you need them can be worth hundreds a year.
2. Think about who claims Social Security when. The exclusion is reduced only by the benefits of the spouse claiming it. In the illustration, if Larry's benefit were smaller, more of his 401(k) money would be excluded.
3. Watch the $350,000 line. The 2% capital gains surtax applies when federal AGI is over $350,000. Spreading a large sale across two tax years can keep each year under the line.
4. Pick your county with eyes open. The gap between a 2.25% county and a 3.30% county is 1.05 points, or $1,050 on $100,000 of taxable income every year.
5. Plan your estate early. With a $5 million estate tax threshold and an inheritance tax on non-exempt heirs, beneficiary choices matter more in Maryland than almost anywhere else.

Fran's summary: "Maryland taxes everything, so plan everything." Larry's summary is unprintable but involves Old Bay.

Early retirees under 65

Before 65, Maryland gives you nothing special. IRA and 401(k) withdrawals, Roth conversions and capital gains are all taxed at the state rate plus county rate. A couple converting $80,000 to Roth would pay roughly 4.75% plus county tax on most of it. That makes Maryland a state where conversions before moving in, or after moving out, are worth modeling. See the Roth conversion ladder timeline.

Estate and inheritance taxes: both

Maryland's estate tax applies to estates over $5 million, with a top rate of 16%, according to the Register of Wills. That threshold is far below the federal exemption. The inheritance tax is 10% on property passing to non-exempt heirs. Spouses, children and other lineal descendants, parents, and siblings are exempt, as are some others. Leaving money to a niece, nephew or friend triggers it. See estate tax basics and talk to a Maryland estate attorney if your estate is near $5 million.

Property tax: the homestead credit

Maryland's Homestead Tax Credit limits how much the taxable assessment of a primary residence can rise each year. The state cap is 10%, and counties and cities can set lower caps; some are as low as 0%. You apply once with the State Department of Assessments and Taxation. There's also a Homeowners' Property Tax Credit for lower-income households, with income tests that look at all income, including nontaxable Social Security.

Residency, estimated payments and how Maryland compares

Maryland residents are taxed on all income, and part-year residents on income while resident. Maryland treats you as a resident if you're domiciled there, or if you keep a place to live there for more than six months and are present more than 183 days. If you move out, cut ties cleanly; see changing your state residency.

You generally need estimated payments if you expect to owe more than $500 after withholding.

Compared with Virginia, Maryland is usually more expensive because of county income taxes and the two death taxes. Pennsylvania exempts retirement income entirely, and New Jersey has a large exclusion with income limits. Watch the federal tax torpedo too.