If you worked for the state of Maryland before you retired, you may receive monthly retirement benefits from the Maryland State Retirement and Pension System. Depending on your circumstances, these benefits may be taxable at both the state and federal levels. These benefits may also be subject to withholding requirements.
Federal Tax Law
The Internal Revenue Service requires you to pay taxes on at least a portion of any state pension you receive. If you had no investment in the pension, the full amount of benefits you receive is taxable. If you did have an investment in the pension, only the portion you didn't contribute is taxable. The IRS considers a contribution to be an investment only if you made it with after-tax funds.
Maryland Tax Law
Under Maryland tax law, the full amount of your state pension is taxable. However, if you're older than 65 or totally disabled, you may qualify to exclude some of your pension benefits from your taxable income. At the time of publication, the maximum amount of benefits you can exclude is $27,100. You may also qualify for this exclusion if you have a spouse who is totally disabled and unable to work.
If you receive Maryland state pension benefits, you must have a portion of your benefits withheld to cover your federal income taxes. Calculate the amount you must withhold using the IRS tax withholding tables. If you receive more pension benefits than you qualify to exclude, you must also have a portion withheld for Maryland taxes. Maryland requires you to designate an exact dollar amount for withholding. You can establish both your state and federal withholding amounts using Maryland state tax Form 766.
If you qualify to exclude pension benefits from your taxable Maryland income, you can exclude only those benefits that you included on your federal income tax return. If your marital status or number of allowances changes, you must alter your withholding by filing an updated copy of Form 766. Although Maryland taxes state pension benefits, you won't owe tax on any Social Security or railroad retirement payments you receive.
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