Maryland’s tax on retirement income has three moving parts: Social Security benefits are fully exempt, qualified pension and 401(k)-type income can be sheltered by an exclusion worth up to $41,200 per person in 2025, and whatever remains flows through graduated state rates of 2% to 6.5% for 2026 plus a county income tax between 2.25% and 3.30%. Traditional IRA withdrawals don’t qualify for the pension exclusion, which is the single most common surprise for new retirees.
How Each Type of Retirement Income Is Taxed
Social Security and Railroad Retirement
Maryland excludes Social Security benefits from state income tax in full, regardless of your other income or filing status. Any amount that was taxable on your federal return is subtracted on line 11 of Form 502.1Maryland Comptroller. Seniors and Retirees Frequently Asked Questions Railroad Retirement benefits get the same treatment.
Pensions, 401(k)s, 403(b)s, and 457(b)s
Distributions from traditional pensions and qualified employer-sponsored plans are carried from your federal AGI to your Maryland return as taxable income, but they are the specific plan types that qualify for the pension exclusion covered below. The exclusion applies whether the plan was earned in Maryland or another state.2Taxpayer Services. Maryland Pension Exclusion
Traditional IRAs, SEPs, and Keoghs
Traditional IRA distributions do not qualify for the pension exclusion. Neither do SEP IRAs or Keogh plans. Maryland treats withdrawals from these accounts as ordinary taxable income with no state-level subtraction beyond the deductions available to all filers.2Taxpayer Services. Maryland Pension Exclusion If a large share of your retirement savings sits in a Traditional IRA rather than a 401(k), this can cost thousands in state tax over a retirement.
Roth IRAs and Roth 401(k)s
Qualified Roth distributions are tax-free federally, and because they never enter your federal AGI, they never appear on the Maryland return. Roth withdrawals are especially valuable for retirees whose pension exclusion is already consumed by other income.
The Pension Exclusion in Detail
Maryland’s pension exclusion (formally the Retirement Income Subtraction) is the largest tax break available to most retirees. To claim it, you must be at least 65 on the last day of the tax year, or totally and permanently disabled, or have a spouse who is totally and permanently disabled.2Taxpayer Services. Maryland Pension Exclusion
The maximum was $41,200 per qualifying person for 2025. The cap is indexed each year to the maximum Social Security benefit, so the 2026 figure appears in that year’s instruction booklet.3Comptroller of Maryland. 2025 Pension Exclusion Computation Worksheet 13A When both spouses on a joint return qualify independently, each can claim the full exclusion against their own retirement income.
Qualifying income sources are limited: defined benefit pensions, 401(a), 401(k), 403(b), and 457(b) plans. IRAs of any kind, SEPs, and Keoghs are excluded.2Taxpayer Services. Maryland Pension Exclusion
The Social Security Offset
Here is the mechanic that catches people. The pension exclusion is reduced dollar-for-dollar by every dollar of Social Security and Railroad Retirement you received during the year, using the total benefit amount rather than the federally taxable portion.3Comptroller of Maryland. 2025 Pension Exclusion Computation Worksheet 13A If your Social Security benefits alone exceed the cap, your pension exclusion drops to zero, though the Social Security itself remains fully exempt.
An example using 2025 numbers: you receive $25,000 in Social Security and pull $50,000 from a 401(k). The $25,000 is subtracted from the $41,200 cap, leaving a $16,200 exclusion against the 401(k) withdrawal. The Social Security is already exempt, so $33,800 of the 401(k) distribution ends up taxable in Maryland.
On a joint return where both spouses receive Social Security but only one receives a pension, only the pension-receiving spouse’s Social Security is entered on the worksheet, which keeps the other spouse’s benefits from eating into the exclusion.3Comptroller of Maryland. 2025 Pension Exclusion Computation Worksheet 13A
Separate Subtractions for Military and Public Safety Retirees
Military retirees and retired public safety employees have their own subtractions. These are alternatives to the standard pension exclusion, not additions, so you use whichever produces the better result.
Military retirees can subtract up to $20,000 of military retirement income regardless of age. The legislature equalized the age brackets starting with tax year 2024; previously, retirees under 55 were capped at $12,500.4Maryland General Assembly. Fiscal and Policy Note for House Bill 952 Unlike the standard pension exclusion, the military subtraction is not reduced by Social Security benefits, which is often the deciding factor.
Retired public safety employees who are at least 55 can subtract up to $15,000. Eligible retirees include former correctional officers, law enforcement officers, and fire, rescue, or emergency services personnel who served the federal government, the State of Maryland, or a Maryland political subdivision.5Maryland General Assembly. Fiscal and Policy Note for House Bill 2 A retiree who qualifies for both the public safety subtraction and the standard pension exclusion at 65 can apply the public safety subtraction first and then use the standard exclusion for any remaining qualifying income, but the same income can’t be subtracted twice.
The Senior Tax Credit at Age 65
Maryland grants a nonrefundable income tax credit to residents who are at least 65 on the last day of the tax year. The credit is $1,000 for single filers with federal AGI up to $100,000. For joint filers, heads of household, and qualifying surviving spouses with AGI up to $150,000, the credit is $1,750, dropping to $1,000 if only one spouse on the joint return has reached 65.6Maryland Comptroller. Technical Bulletin 51 – Senior Citizens and MD Income Tax
Because the credit is nonrefundable, it can zero out your Maryland tax but won’t produce a refund on its own. Part-year residents who qualify don’t need to prorate it. You claim it on Form 502CR and carry the total to Form 502.7Maryland Comptroller. Maryland Form 502CR Income Tax Credits for Individuals
State and Local Rates for 2026
Whatever retirement income remains taxable after the subtractions above runs through Maryland’s graduated brackets. The state rate begins at 2% on the first $1,000 of taxable income and climbs by steps. For 2026, the legislature added two brackets at the top: 6.25% on income above $500,000 for single filers ($600,000 joint) and 6.5% on income above $1,000,000 ($1,200,000 joint).8Maryland Comptroller. 2026 Maryland State and Local Income Tax Withholding Information Most retirees will never touch those. The 4.75% rate covers taxable income from $3,001 up to $100,000 single ($150,000 joint), which is where typical retirement income lands.
Each of Maryland’s 23 counties and Baltimore City adds a local income tax on top of the state rate. For 2026, local rates run from 2.25% in Worcester County to 3.30% in Dorchester and Kent counties, with most jurisdictions near 3.20%.9Maryland Department of Legislative Services. 2026 County Local Tax Rates The county you live in on the last day of the year sets the rate. A retiree with $80,000 in taxable income in a 3.20% county faces a combined marginal rate near 7.95%.
Estate and Inheritance Tax for Heirs
Maryland is one of the few states with both an estate tax and an inheritance tax, and both affect what your heirs receive rather than what you owe during retirement. The estate tax applies to estates above $5 million, a threshold fixed since 2019 and not indexed for inflation, well below the federal exemption of $15 million per individual for 2026.10Maryland General Assembly. Fiscal and Policy Note for Senate Bill 211 – Maryland Estate Tax – Repeal Married couples can effectively shield up to $10 million through portability. A repeal bill (Senate Bill 211) was introduced in the 2026 session but had not been enacted at this writing.
The inheritance tax is paid by the recipient, not the estate, and most close family members are exempt: spouses, children, grandchildren, parents, grandparents, stepchildren, siblings, spouses of children, and registered domestic partners, along with charities and government entities. Everyone else, including nieces, nephews, cousins, aunts, uncles, and unrelated beneficiaries, pays a flat 10%.11Register of Wills. Inheritance Tax
Estimated Payments Once the Paychecks Stop
Retirement changes how you pay Maryland tax, not just how much. If your retirement income is not subject to Maryland employer withholding and would produce more than $500 in state tax for the year, you must file a declaration of estimated tax on Form 502D, with quarterly installments typically due in April, June, September, and January.12Legal Information Institute. Maryland Code Regs. 03-04-01-02 – Estimated Tax Return
Many retirees sidestep the quarterly process by requesting voluntary withholding on their pension or Social Security. If you don’t withhold and end up short, Maryland charges interest at rates that reached 11.4825% for calendar year 2025, and late-payment penalties can climb to 25% of tax owed.13Taxpayer Services. Penalty and Interest Charges You generally avoid penalties by paying at least 90% of your current-year liability or 110% of last year’s liability through the year.