How Maryland income tax works: two taxes on one Form 502

Maryland collects two income taxes on one return. The state tax runs through ten brackets, from 2% on the first $1,000 of taxable income to 6.5% above $1,000,000 single or $1,200,000 joint, with a single 4.75% rate covering everything from $3,000 up to $100,000 single or $150,000 joint. Then every one of the 23 counties and Baltimore City adds its own income tax, 2.25% to 3.3%, on the same taxable income, on Line 28 of the same Form 502. For most households the two together come to just under 8%. That combined figure, not the 4.75%, is what a raise, a bonus or an IRA withdrawal costs in Maryland. The return starts from federal adjusted gross income, so nothing the federal return does after AGI, the standard deduction, the new deductions for tips, overtime and seniors, the qualified business income deduction, ever reaches it.

The starting point matters as much as the rates. Federal AGI is income after the adjustments on Schedule 1 of the 1040 but before any deduction below that line. An IRA or HSA contribution, student loan interest and half of self-employment tax all reduce AGI, so they reduce Maryland and county tax too. The $6,000 federal senior deduction, the tips and overtime deductions and the car-loan interest deduction do not. The Comptroller of Maryland said so in a tax alert effective January 6, 2026: those four deductions “do not impact the calculation of an individual’s Maryland tax liability,” are not reported on the Maryland return, and cannot be claimed as Maryland itemized deductions. The 2026 General Assembly enacted no Maryland version of any of them.

Who files

A full-year resident files Form 502 and reports all income, wherever earned, with a credit on Form 502CR Part A for tax paid to another state on income taxed by both. A part-year resident also files Form 502, checks the part-year box, and subtracts the income received while living elsewhere on Line 12. A nonresident with Maryland-source income files Form 505 with Form 505NR and, instead of a county tax, pays a special nonresident rate of 2.25%. Residents of Pennsylvania, Virginia, West Virginia and the District of Columbia who work in Maryland are the exception: under the reciprocal agreements their wages are taxed only at home, and they give the employer Form MW507 to stop the withholding. The details are in Moving to Maryland. Married couples generally use the same filing status they used federally.

Where it starts: federal AGI, Line 1

Line 1 of Form 502 is federal adjusted gross income, copied from the 1040; Lines 1a through 1d break out wages, earned income, capital gain and retirement income because credits and the surcharge key off them. The federal standard deduction, $32,200 joint for 2026, is not Maryland’s; Maryland has a much smaller one of its own.

The additions, Lines 2 to 6

Most households add nothing. The items that come up are few.

Other states’ municipal bond interest. Line 2 adds interest on state and local bonds from outside Maryland. Interest on Maryland and its local governments’ bonds stays exempt. A brokerage 1099 that lumps all tax-exempt interest together has to be split.

State retirement pickup. Line 3 is for Maryland state and local government employees whose pension contributions were “picked up” by the employer and left out of federal wages. Maryland adds them back; the figure is on the W-2.

Bonus depreciation. Maryland has never followed federal bonus depreciation. A sole proprietor, landlord or farmer who took it on a federal Schedule C, E or F adds the difference back on Form 500DM and recovers it through regular depreciation in later years. For 2026 the state also decouples from the new federal expensing of qualified production property under section 168(n), and limits manufacturers to 20% bonus depreciation. Research expensing and the business interest limit, which Maryland decoupled from for 2025 only, are followed for 2026.

The subtractions, Lines 8 to 15

This is where the return gives money back, and three of the lines matter to a great many filers.

Form 502SU lists some forty coded subtractions. Interest on U.S. Treasury obligations, which the federal return taxes and Maryland does not, is among them.

Social Security, Line 11. Whatever part of a Social Security benefit was taxed federally comes off here, in full. There is no age test and no income cap.

The pension exclusion, Line 10a. A taxpayer 65 or older, or totally disabled, may exclude income from an employer retirement plan, a pension, a 401(k), a 403(b) or a governmental 457(b), up to a cap that tracks the maximum Social Security benefit: $41,200 for 2025 and $40,600 for 2026. The cap is reduced dollar for dollar by the Social Security the taxpayer received, whether or not any of it was taxed. Traditional IRA, Roth IRA, SEP and SIMPLE withdrawals do not qualify and are taxed in full at both the state and county rates. Roth conversions are IRA income. That rule, and what it does to a retiree who rolled a 401(k) into an IRA, is the subject of Maryland for retirees.

529 contributions, Line 13. Up to $2,500 a year per contributor per beneficiary for deposits to the Maryland College Investment Plan, and $2,500 per contract for the Prepaid College Trust; anything over the cap carries forward, ten years for the investment plan. Grandparents who contribute get their own $2,500. Out-of-state plans do not qualify. The federal return asks nothing about 529 deposits, which is why this subtraction is so often left off.

The deduction: standard or itemized, Line 17

Maryland’s standard deduction is small and flat. For 2025 it was $3,350 single, married filing separately or dependent, and $6,700 joint, head of household or qualifying surviving spouse; the 2025 budget law repealed the old 15%-of-income phase-in and indexed the amount from 2026. The Comptroller has not formally announced the 2026 figure. Its 2026 estimated-tax worksheet still prints $3,350 / $6,700; its 2026 Employer Withholding Guide uses $3,400 single, which points to $3,400 / $6,800 (verify). Expect the latter on the 2026 Form 502 instructions.

You may itemize on the Maryland return only if you itemized federally. The Maryland itemized figure is the federal Schedule A total (Line 17a) minus the state and local income taxes deducted there (Line 17b), minus, since 2025, a phase-down of 7.5% of federal AGI above $200,000, or $100,000 married filing separately (Line 17c). A single filer with $250,000 of AGI loses $3,750 of itemized deductions to that line. Because state income tax is stripped out, a household whose federal Schedule A is mostly state tax often finds the Maryland itemized total is below the small standard deduction. Run both.

The exemptions, Line 19

Each taxpayer, spouse and dependent is worth $3,200, plus $1,000 more for each taxpayer or spouse who is 65 or older or blind. A family of four claims $12,800; a retired couple both over 65 claims $8,400. The amounts are not indexed. They phase down with federal AGI: on a single return each $3,200 exemption falls to $1,600 above $100,000, to $800 above $125,000, and to zero above $150,000; on a joint or head-of-household return the steps are $150,000, $175,000 and $200,000. The $1,000 age and blindness exemptions do not phase out. Dependents are listed on Form 502B.

The state tax, Line 21

Federal AGI, plus additions, minus subtractions, is Maryland adjusted gross income, Line 16. Minus the deduction, minus the exemptions, it is Maryland taxable net income, Line 20. The state tax comes from the rate schedule.

The first three brackets together are worth $90 of tax. From there the schedule reads: $90 plus 4.75% of taxable income over $3,000, up to the top of the 4.75% band. The 6.25% and 6.5% brackets were added by the 2025 budget law; 2026 is their second year.

Capital gains, dividends, interest and wages are all taxed through the same schedule. There is no lower rate for long-term gains. There is, since 2025, a higher one for some filers: an individual whose federal AGI is over $350,000, on any filing status, pays an additional 2% on the net capital gain included in Maryland income, figured on Form 502CG and entered on Line 21b. It is a cliff, not a ramp; a dollar of AGI over $350,000 puts all of the gain in. The exceptions are gain on a primary residence that sold for under $1,500,000, gain inside 401(k), IRA and other retirement accounts, breeding livestock held over a year by a taxpayer mostly in farming, land under a conservation or agricultural easement, business property expensed under section 179, and nonprofit-owned affordable housing. Gain deferred in a like-kind exchange is not in AGI and so is not reached. See Capital gains for the federal side.

The county tax, Line 28

The county tax is computed on the same Maryland taxable net income, at the rate of the county where you lived on December 31. Dorchester and Kent are at 3.30%, the new statutory maximum for tax years beginning after December 31, 2025. Anne Arundel and Frederick use graduated local brackets: Anne Arundel 2.70% to $50,000 single / $75,000 joint, 2.94% to $400,000 / $480,000, and 3.20% above; Frederick 2.25% to $25,000, 2.75% to $50,000 single / $100,000 joint, 2.96% to $150,000 / $250,000, and 3.20% above. The 2026 changes are Allegany, from 3.03% to 3.20%, and Kent, from 3.20% to 3.30%.

The county is the one you lived in on the last day of the year, entered with its political subdivision code at the top of Form 502. Move from Howard to Worcester in November and the whole year’s county tax is Worcester’s.

Put the two together and the marginal rate for a couple in the 4.75% band in a 3.20% county is 7.95%; at the top it is 9.8%, plus the 2% on gains. Most counties offer a local earned income credit against the county tax on Line 29.

The credits, Lines 22 to 26

The earned income credit reaches workers without children at any age and ITIN filers who are shut out of the federal credit. The senior credit has a cliff, not a phase-out: one dollar of federal AGI over $100,000 single or $150,000 joint and the whole $1,000 or $1,750 is gone. Form 502CR also carries a one-time long-term care insurance credit and the refundable Student Loan Debt Relief credit. The family credits are covered in Credits and breaks for Maryland families, the senior credit in Maryland for retirees.

Withholding and estimated payments

Employers withhold from Form MW507, where the employee claims exemptions worth $3,200 each and names the county, so the county line is usually covered. Pension payers and IRA custodians often withhold no Maryland tax unless asked.

Anyone who expects to owe more than $500 after withholding must make estimated payments, on Form PV, due April 15, June 15 and September 15, 2026 and January 15, 2027. The safe harbor the Comptroller’s worksheet states is 110% of the prior year’s tax; whether a 90%-of-current-year test also applies is to be confirmed on Form 502UP (verify). Prize and lottery winnings of $500 or more with no Maryland withholding must be paid on within 60 days. See Estimated payments.

How to file

Most returns are e-filed with the federal return. The Comptroller’s free portal, Maryland Tax Connect at mdtaxconnect.gov, replaced iFile on September 1, 2026; it files Form 502 directly, takes payments and shows refund status, but does not file the federal return. The return is due April 15, 2027. The extension to October 15 is automatic: if you have a federal extension and owe no Maryland tax, do nothing; otherwise request it through Maryland Tax Connect or send Form PV with the payment by April 15. The extension is to file, not to pay. Interest and penalty run on anything unpaid after April 15. Dates and forms are collected in Maryland calendar and forms; the year’s changes in What’s new in Maryland for 2026; the numbers in Maryland figures at a glance.

What trips people up

• Expecting the federal tips, overtime or senior deduction to lower Maryland tax. None of them reaches Form 502.
• Carrying the full pension exclusion on IRA income. Only employer-plan income qualifies, and the cap is reduced by Social Security.
• The wrong county. It is where you lived on December 31, not where you worked and not where you lived most of the year.
• Itemizing in Maryland after taking the federal standard deduction, or itemizing with a Schedule A that is mostly state income tax. After Line 17b the standard deduction often wins.
• A 529 contribution nobody mentioned, because the federal return did not ask.
• The senior credit or the full exemptions taken with federal AGI just over $100,000 single or $150,000 joint.
• A capital gain in a year when federal AGI crossed $350,000, with no Form 502CG.
• The extension treated as an extension to pay.