Moving to Maryland

Maryland taxes a resident on everything and a nonresident on Maryland-source income, and the line between the two is drawn twice. You are a resident if you were domiciled in Maryland on the last day of the year, your true, fixed, permanent home, wherever you happened to be. You are also a resident, whatever your domicile, if you kept a place to live in Maryland for more than six months of the year and were physically present 183 days or more; any part of a day counts. Residents pay the state brackets plus the county tax of the county they lived in on December 31. Nonresidents file Form 505 and pay the state brackets plus a 2.25% special rate instead of county tax. The big exception is wages: a resident of Pennsylvania, Virginia, West Virginia or the District of Columbia who works in Maryland owes Maryland nothing on them, and a Maryland resident who works in any of those four pays only Maryland. Everything else, a rental, a business, a sale of Maryland land, is taxed where it sits, with a credit on the resident return to keep it from being taxed twice.

The year you move, you file Form 502 as a part-year resident, report everything, and subtract on Line 12 the income you received while living elsewhere. The exemptions and the standard deduction are prorated. The county tax follows the county you lived in on the last day of your Maryland residence, December 31 for someone who arrived, the move-out date for someone who left (verify against Instruction 26), at that county’s full rate on the part-year taxable income.

Resident, statutory resident, nonresident

Domicile is not defined in the statute. The Comptroller’s Administrative Release 37 borrows the courts’ phrase: the place a person intends to return to when absent. Intent has to be backed by action. To change domicile you must be physically present in the new place, put down ties there, and cut them here. A temporary absence for work, health or pleasure, however long, does not change it, and you can have only one domicile at a time even with several houses. The release lists what the Comptroller looks at when a change is disputed, in roughly this order: where you live and where you are registered to vote; the homes you own or rent, their size and value; how and where your time is spent; where the things “near and dear” to you are kept, heirlooms, collections, pets; where you earn your living and how much business you still do in Maryland; where your family is and where the children go to school, and your social, community and religious ties; and the paperwork, vehicle registration, bank accounts, safe deposit box, driver’s license.

The statutory-resident test is mechanical and has nothing to do with intent. A place of abode is a dwelling you maintain and can use, not a hotel room; the release says owning a vacation home or visiting family does not by itself meet it. Maintain one for more than six months and spend 183 or more days in the state, counting any part of a day as a day, and you are a Maryland resident for the whole year, taxed on worldwide income, even if your domicile and your voting registration are elsewhere. Someone with a Maryland place of abode who is present fewer than 183 days is a nonresident and owes tax only on Maryland-source income. The people this catches are commuters who rent an apartment near work, owners of a second home who spend summers here, and the person who moved out but kept the house and kept coming back.

A resident of PA, VA or DC who keeps a Maryland place of abode 183 days or more is a statutory resident and the wage agreement no longer protects them; West Virginia’s agreement has no day limit.

The part-year return

A part-year resident uses Form 502, not Form 505. Check the part-year box, enter the dates of Maryland residence and the other state, and start as everyone does from federal AGI on Line 1. Line 12 then subtracts the income received during the period of nonresidence, so long as it was not Maryland-source: wages earned before you arrived, interest and dividends paid before the move, a pension payment dated before the move. Maryland-source income earned while a nonresident, rent from a Maryland property or wages for days worked here, stays in. The standard deduction and the exemptions are prorated for the months of residence (verify proration method against Instruction 26). Additions and subtractions, the pension exclusion among them, are limited to the resident period as well. The county tax is the full rate of the last Maryland county you lived in, on the part-year taxable income.

Pension and IRA income is allocated by the date of each payment. Under federal law a state may not tax the retirement income of someone who no longer lives there, so a Maryland pension paid to a new resident of another state is that state’s to tax, not Maryland’s, from the month after the move. The reverse holds too: a retiree who moves into Maryland in July owes Maryland on the second half of the year’s pension and IRA payments, with the pension exclusion available on the employer-plan part at 65 and nothing on the IRA part. See Maryland for retirees.

Reciprocity: Pennsylvania, Virginia, West Virginia and DC

Maryland has wage agreements with its four neighbors to the north, south and west, and with the District. They cover wages, salaries, tips and commissions, nothing else. A Virginia resident who works in Bethesda pays Virginia on the wages and owes Maryland nothing; she gives her employer Form MW507 with Line 4 completed, certifying that she does not keep a Maryland place of abode for 183 days or more, and no Maryland tax is withheld. If Maryland tax was withheld anyway, she files Form 505 to get it back. A Pennsylvania resident does the same on Line 5 for the state tax, but Maryland employers must still withhold the local tax of the county where he works unless his home jurisdiction does not tax Maryland residents; residents of York and Adams counties claim that exemption on Line 6, and residents of other Pennsylvania localities that do not tax Marylanders use Line 7.

The agreement runs the other way just as cleanly. A Maryland resident who works in Arlington, in Washington, in Philadelphia or in Martinsburg pays Maryland and the county on the wages and nothing to the work state, files no nonresident return there, and takes no credit on Form 502CR Part A for them. If the work-state employer withheld its tax by mistake, the fix is a nonresident return there claiming a full refund, not a Maryland credit.

Two limits. First, the agreement is for wages. A Virginia resident’s Maryland rental, a DC resident’s Maryland consulting business, a Pennsylvanian’s share of a Maryland partnership are all Maryland-source income taxed on Form 505, and the home state gives the credit. Second, the 183-day test. A resident of Pennsylvania, Virginia or DC who keeps a Maryland place of abode for 183 days or more becomes a Maryland statutory resident, files a resident Form 502 on all income, and applies to the home state for whatever credit it gives. West Virginia’s agreement is the exception: a West Virginia domiciliary owes no Maryland tax on wages regardless of days in Maryland.

Credit for tax paid to another state

A Maryland resident taxed by another state on income that Maryland also taxes claims a credit on Form 502CR Part A. The credit is the smaller of the tax actually paid to the other state or the Maryland tax on the same income, and a copy of the other state’s return, not just the W-2, must be attached. The form sorts states into three groups. Group I is every state without a reciprocal agreement, where the credit applies to all income including wages. Group II is the four reciprocal jurisdictions, where it applies only to non-wage income, since the wages were never taxed there. Group III is the states with no income tax, where there is nothing to credit. Since the Supreme Court’s 2015 decision in the Wynne case the credit reaches the county tax as well as the state tax; the local share is carried to Line 31 through Form 502CR Part BB (verify mechanics). A resident who works in Delaware, which has no agreement with Maryland, pays Delaware as a nonresident, pays Maryland and the county as a resident, and recovers the overlap here. The credit never produces a refund of Maryland tax; it stops at the Maryland tax on the doubly taxed income, so when the other state’s rate is higher the difference is simply lost.

Remote work across the line

Maryland taxes a nonresident on wages for work physically performed in Maryland. For a resident of a non-reciprocal state employed by a Maryland company, the Maryland share of wages is the share of days worked in Maryland; days worked from home elsewhere are not Maryland-source. Maryland does not apply a “convenience of the employer” rule that would treat home-office days as Maryland days. The opposite case is the one to watch: a Maryland resident working from home for an employer based in a state that does apply such a rule may be taxed by that state on the home days too, and then claims the Part A credit here. Keep a day count. The employer’s W-2 allocation is a starting point, not the last word.

Selling Maryland real estate after you leave

When a nonresident sells Maryland real property, the settlement agent withholds Maryland tax at closing, 8.75% for an individual, on Form MW506NRS, and sends it to the Comptroller. It is a prepayment, not the tax. The seller files Form 505 for the year, reports the gain as Maryland-source income, and gets back whatever the withholding exceeded. A former resident who sells the old house after moving should check whether the federal home-sale exclusion wipes out the gain; if it does, the gain is not in federal AGI and Maryland has nothing to tax, though the withholding may still be collected at closing and recovered on the return unless an exemption certificate is obtained first. Gain on a primary residence that sold for under $1,500,000 is also outside the 2% capital gains surcharge. See The home sale exclusion.

Military families

A service member’s domicile of record decides the state, not the duty station; orders to Fort Meade or Andrews do not make anyone a Maryland resident. A spouse who is in Maryland solely to be with the service member and keeps a domicile in another state is exempt from Maryland tax and withholding on wages under the Military Spouses Residency Relief Act: Form MW507 Line 8 with the state of domicile, “EXEMPT” in the box, a copy of the military ID, and Form MW507M attached.

The year you move: what to do

• Moving in. File a new MW507 with the employer on day one, naming your Maryland county, so county tax is withheld from the first check. Register to vote, get the Maryland license and registration, and move the bank and the safe deposit box; each is on the Comptroller’s domicile list. Keep the closing statement or lease showing the date.
• Moving out. Do the same in reverse. Cancel the Maryland voter registration. If you keep the Maryland house, understand that keeping it and visiting it 183 days makes you a statutory resident regardless of where you vote. Tell pension payers and IRA custodians the new address so Maryland withholding stops.
• Count the days. If you will have homes in two states in the same year, keep a calendar. Any part of a day in Maryland is a Maryland day.
• Split the income. Keep final pay stubs from the old job and the first from the new one, brokerage statements by month, and the dates of every pension and IRA payment. Line 12 needs them.
• Estimated payments. If the new job withholds for the wrong state for a few months, make a Maryland estimated payment on Form PV before the next due date to avoid interest.