Retirement is a phase of life that many look forward to, but it comes with its own set of financial considerations, particularly in the realm of tax planning. For retirees in Maryland, understanding the state's specific tax regulations is crucial to optimizing income and minimizing tax liabilities. This guide delves into the intricacies of tax planning for retirees in Maryland, including how retirement income is taxed, available state tax credits, federal tax considerations and estate and inheritance tax planning.
Maryland has specific regulations that impact how retirement income is taxed. The key components include Social Security benefits, pensions and other retirement savings plans.
Maryland does not tax Social Security benefits. This aligns with federal taxation rules, which only tax Social Security benefits if a retiree's income exceeds certain thresholds. This means retirees in Maryland who rely primarily on Social Security benefits can enjoy this income free of state taxes.
Maryland offers a pension exclusion for residents aged 65 and older or those who are totally disabled. For the tax year 2024, the maximum pension exclusion is $39,500. This exclusion allows eligible retirees to subtract a portion of their pension income from their federal adjusted gross income (AGI) before calculating state taxes. However, not all types of retirement income qualify. The exclusion applies to income from employee retirement systems, including 401(k) plans and 403(b) plans, but does not cover income from IRAs, Roth IRAs or ineligible deferred compensation plans.
Maryland provides additional tax benefits for military retirees. Those who are at least 55 years old can exclude up to $20,000 of military retirement income from their state taxes. This benefit extends to individuals who served in the U.S. Armed Forces, the Maryland National Guard and certain other federal services.
Maryland offers several tax credits that can significantly reduce the tax burden for retirees.
Retirees in Maryland may be eligible for various state income tax credits:
Maryland also offers a tax credit for purchasing long-term care insurance. This credit is particularly beneficial for retirees who are planning for potential future healthcare needs. The credit amount is limited, but it can still provide significant savings.
While state taxes are an important consideration, federal taxes also play a critical role in retirement planning. Retirees must consider how federal taxes apply to their Social Security benefits, retirement account withdrawals and other sources of income.
For retirees over the age of 73, the IRS requires withdrawals from certain retirement accounts, such as traditional IRAs and 401(k)s. These withdrawals are known as Required Minimum Distributions (RMDs). The amount withdrawn is added to the retiree’s income and taxed at the federal level. Maryland retirees need to plan carefully for RMDs to avoid being pushed into a higher tax bracket. The age for starting RMDs was changed to 73 under the SECURE 2.0 Act, reflecting recent federal tax law updates.
While Maryland does not tax Social Security benefits, the federal government does tax these benefits if a retiree’s income exceeds certain thresholds. Up to 85% of Social Security benefits may be taxable at the federal level, depending on the retiree's combined income. This makes it essential for retirees to understand their overall income picture and plan withdrawals from other retirement accounts accordingly.
Maryland is one of the few states that impose both an estate tax and an inheritance tax, making estate planning an essential part of tax planning for retirees.
The Maryland estate tax applies to estates valued over $5 million as of 2024. Estates exceeding this threshold are taxed at rates ranging from 0.8% to 16%. However, the state allows for certain deductions and credits that can reduce the taxable estate, such as charitable donations and administrative expenses.
Maryland also imposes an inheritance tax on beneficiaries who are not direct descendants, such as nieces, nephews and friends. The tax rate is typically 10% of the value of the inheritance. Direct descendants, such as children and grandchildren, are generally exempt from this tax. Proper estate planning, including the use of trusts and gifting strategies, can help minimize or eliminate the impact of Maryland's inheritance tax.
Retirees can employ several strategies to reduce the impact of estate and inheritance taxes in Maryland:
Tax planning for retirees in Maryland requires a nuanced understanding of both state and federal tax laws. By taking advantage of Maryland's pension exclusions, state tax credits and federal tax benefits, retirees can significantly reduce their tax liabilities. Additionally, proactive estate and inheritance tax planning can ensure that more of a retiree's wealth is passed on to their heirs rather than being consumed by taxes.
