Maryland taxes military retirement pay, but the state lets qualifying retirees subtract a slice of it before calculating tax. Under the Maryland military retirement tax rules for 2025, you can subtract up to $12,500 of military retirement income if you are under 55, or up to $20,000 if you are 55 or older. Retirees who are 65 or older, or totally disabled, can layer a separate pension exclusion worth up to $41,200 on top of that, reduced dollar-for-dollar by Social Security. Neither benefit is automatic; both have to be claimed on Form 502.
Why the Subtraction Matters
Your military pension is part of your federal adjusted gross income, which is where Maryland starts its own tax calculation. Without a subtraction, every dollar is exposed to the state’s graduated rates, which run from 2.00% on the first $1,000 of taxable income up to 6.50% on income above $1,200,000 for joint filers or $1,000,000 for single filers in 2026. Most retirees with moderate pensions land in the 4.75% bracket that begins at $3,001.1Maryland Comptroller. 2026 Maryland State and Local Income Tax Withholding Information
On top of that, every county and Baltimore City charges a local income tax. For 2026, those local rates range from 2.25% in Worcester County to 3.30% in Dorchester and Kent Counties.2Maryland Department of Legislative Services. 2026 Local Tax Rates Combined state and local rates can push into the high single digits on each taxable pension dollar, which is exactly what the military subtraction is designed to blunt.
The Military Retirement Subtraction
Maryland law allows a subtraction from federal adjusted gross income based on your age on the last day of the tax year:3Maryland General Assembly. Maryland Tax – General Code 10-207
- Under age 55: up to $12,500 of military retirement income.
- Age 55 or older: up to $20,000 of military retirement income.
The subtraction can’t exceed what you actually received. If your pension paid $15,000 and you are 55 or older, you subtract $15,000, not $20,000.
Who Qualifies
The subtraction covers retirement income from service in any active or reserve component of the U.S. Armed Forces, the Maryland National Guard, or the commissioned corps of the Public Health Service, NOAA, or the Coast and Geodetic Survey.4Maryland.gov. Retirement Pay and Pension Tax Deductions and Exclusion Surviving spouses and former spouses receiving Survivor Benefit Plan annuities, Reserve Component Survivor Benefit Plan payments, or Retired Serviceman’s Family Protection Plan benefits qualify for the same age-based amounts.3Maryland General Assembly. Maryland Tax – General Code 10-207
The Pension Exclusion at 65
The benefit many military retirees overlook kicks in at 65. Maryland offers a general pension exclusion of up to $41,200 for tax year 2025 (indexed annually to the maximum Social Security benefit) if you are 65 or older, totally disabled, or have a spouse who is totally disabled on the last day of the tax year.5Maryland Comptroller. 2025 Pension Exclusion Computation Worksheet 13A The exclusion applies to qualifying pension and annuity income from employee retirement systems qualified under IRC Sections 401(a), 403, or 457(b). Traditional IRAs, Roth IRAs, SEPs, and Keogh plans do not qualify.6Maryland Comptroller. Technical Bulletin 51 – Senior Citizens and Maryland Income Tax
The exclusion is reduced dollar-for-dollar by Social Security and Railroad Retirement Act benefits received during the year. If you collected $25,000 in Social Security, your maximum exclusion drops from $41,200 to $16,200. A retiree with substantial Social Security may see the exclusion largely wiped out.
Stacking Both Benefits
The pension exclusion worksheet tells you not to include any amount already subtracted as military retirement income.5Maryland Comptroller. 2025 Pension Exclusion Computation Worksheet 13A That confirms the two are separate benefits and can be claimed together. A 65-year-old with both military retired pay and a qualifying civilian pension (a federal FERS annuity, for example) can subtract up to $20,000 of the military pay under the military subtraction, then apply the pension exclusion to the civilian pension. For retirees with several income streams, the combination can shield a large share of retirement income from Maryland tax.
Claiming the Benefits on Form 502
Both benefits sit on Form 502, but on different lines with different supporting forms.
Military Retirement Subtraction
Claim the military subtraction on Line 13 of Form 502 using code letter “u.” Complete Form 502SU (Maryland Subtractions from Income) and enter the subtraction there, and enter the amount on Part 5, Line 10 of Form 502R (Retirement Income Form).6Maryland Comptroller. Technical Bulletin 51 – Senior Citizens and Maryland Income Tax Tax software will usually route this for you once you enter the military 1099-R. On a paper return, leaving off code “u” or Form 502SU means the subtraction won’t post.
Pension Exclusion
Claim the pension exclusion on Line 10a of Form 502. Complete the Pension Exclusion Computation Worksheet (13A) from Instruction 13 of the resident tax booklet and attach Form 502R.7Maryland Comptroller. 2025 Maryland State and Local Tax Forms and Instructions The worksheet handles the Social Security offset. Don’t double count: any military retirement income already subtracted on Line 13 stays out of Line 1 of the worksheet.
Military Payments That Aren’t Taxed at All
Several categories of military-related income never enter your federal adjusted gross income and never appear on your Maryland return, so they should not be added into the amount you subtract as military retirement pay.
VA Disability Compensation
Disability compensation from the Department of Veterans Affairs is excluded from federal gross income as a pension or allowance for injuries resulting from active military service.8Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness That covers monthly disability payments, pension payments, and grants for adaptive housing or vehicles. Because these never hit your federal AGI, Maryland can’t tax them either.
Combat-Related Special Compensation
CRSC is a separate monthly payment for retirees with combat-related disabilities. It is non-taxable and issued by DFAS as a distinct payment from your regular retired pay.9Defense Finance and Accounting Service. CRDP CRSC FAQs If you get both, expect two deposits: taxable retired pay and tax-free CRSC. Only the retired pay counts toward the Maryland subtraction.
Dependency and Indemnity Compensation
DIC payments to surviving spouses and dependents of service members who died from service-connected causes are entirely tax-free at both the federal and state level. They do not belong on your Maryland return.
Survivor Benefit Plan Annuities Are Different
SBP annuities are taxable. They appear on a 1099-R and flow into federal AGI like regular retired pay. Maryland treats them the same as military retirement pay for the subtraction, so a surviving spouse can claim up to $12,500 under 55 or up to $20,000 at 55 and older.3Maryland General Assembly. Maryland Tax – General Code 10-207
Withholding and Estimated Payments
DFAS withholds federal income tax from your retired pay based on the W-4 on file. You can update it any time through myPay or by submitting a new W-4.10Defense Finance and Accounting Service. Federal Income Tax Withholding If you claim exempt status, you must recertify each year with a new W-4. Miss that deadline and DFAS defaults your status to single with zero exemptions.
The Maryland subtraction reduces your state liability, but DFAS doesn’t automatically adjust state withholding to reflect it. Some retirees find they overwithheld all year and get a refund at filing. Others with income beyond the pension, like rental income or investment gains, may need to make quarterly estimated payments if withholding falls short. The IRS requires estimated payments when you expect to owe $1,000 or more after subtracting withholdings and credits,11Internal Revenue Service. Estimated Taxes and Maryland has a similar rule. Underpaying can trigger a penalty even in a year when you’re eventually owed a refund.
Pending Change for Under-55 Retirees
House Bill 857, introduced in the 2026 Maryland legislative session, would raise the military retirement subtraction for retirees under 55 from $12,500 to $20,000, matching the amount already available at 55 and older. If enacted, it would apply to tax years beginning after December 31, 2025.12Maryland General Assembly. HB0857 – Income Tax Subtraction Modification for Military Retirement Income The bill had not been signed into law at the time of this writing, so the current two-tier structure ($12,500 under 55, $20,000 at 55 and older) still governs 2025 returns filed in 2026.