A pension is a regular income after you retire from working. You may receive a pension from a former employer or trade union, from a government body or from an insurance company. Maryland considers a pension to be a regular form of income, subject to income tax just as a typical paycheck would be. However, in some circumstances you may be able to avoid paying Maryland tax on some or all of your pension income.
Income Tax Rate
At time of publication, Maryland residents pay state income tax starting at a rate of 2 percent for the first $1,000 up to a max of 6.5 percent for income exceeding $1,000,000. Nonresidents who earn a pension from Maryland pay 1.25 percent in addition to the standard income tax rate. Some Maryland counties, along with the city of Baltimore, levy additional local taxes on pension income.
Maryland Pension Exclusion Program
If you qualify, you can exclude up to $26,100 of your pension income when calculating your Maryland state income tax liability. This means the amount of income on which you owe tax may be significantly lower, making your Maryland income tax payment lower or even eliminating your state tax liability altogether.
In order to qualify for Maryland's pension exclusion tax program, you must be at least 65 years of age or fully disabled. You can also qualify if your spouse is totally disabled. Your pension income must be from a recognized "employee retirement system" and cannot be from a personal retirement account, IRA, Keogh Plan or other source.
Calculate your federal tax liability before starting your Maryland taxes, as your pension exclusion eligibility depends on the amount of pension and retirement annuity included in your federal adjusted gross income, known as your AGI. Enter this amount on line 1 of the "Pension Exclusion Computation Worksheet." Subtract any Social Security and retirement benefits from $26,100, which is the maximum pension exclusion amount in Maryland. Enter this number on line 4 of the worksheet. The smaller of line 1 or line 4 is the amount of pension you can exclude from your taxable income when calculating your Maryland income tax payment.
- CNN Money: Ultimate Guide to Retirement: Will I Pay Tax on My Pension Payouts?
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