What is new in Maryland for 2026: the federal deductions that never arrive, and year two of the budget law

The 2026 Maryland return will look a great deal like the 2025 return, and the biggest news is something that did not happen. The federal law of July 2025 created deductions for tips, overtime pay, people 65 and older and car-loan interest. None of them reach Form 502. Maryland starts its return from federal adjusted gross income, those deductions are taken after it, and the Comptroller of Maryland said in a January 6, 2026 alert that they “do not impact the individual’s Maryland tax liability.” The General Assembly’s 2026 session enacted no Maryland version. So a tipped worker who owes no federal tax on tips still pays the state and the county on every dollar of them, at close to 8% combined. Beyond that: 2026 is the second year of the 2025 budget law’s 6.25% and 6.5% brackets and its 2% capital gains surcharge, the county tax ceiling rises from 3.2% to 3.3%, the standard deduction is indexed for the first time, the pension exclusion cap drops to $40,600, and iFile is gone, replaced by Maryland Tax Connect.

The federal law of 2025, and what reaches Form 502

Form 502 Line 1 is federal adjusted gross income, Line 11 of the federal Form 1040. Everything the federal return does after that line, the standard deduction, itemized deductions, the senior deduction, the deductions for tips, overtime and car-loan interest, the qualified business income deduction, is invisible to Maryland unless Maryland chooses to copy it. Everything the federal return does before that line, IRA and HSA contributions, student loan interest, half of self-employment tax, flows through automatically. That one design choice explains the whole table.

Sources: the Comptroller’s tax alert on the One Big Beautiful Bill Act (effective January 6, 2026) and the fiscal note to SB 284 of 2026. The alert covers tax year 2025; the 2026 treatment of §174A and §163(j) follows from the statute, not from a Comptroller publication yet (verify when the 2026 Form 502 instructions appear).

The practical point for a wage earner: if your W-2 shows tips or overtime, expect your Maryland tax to be higher than your federal tax for the first time. The federal return takes the tips out; Maryland and the county keep them in.

Year two of the 2025 budget law

The Budget Reconciliation and Financing Act of 2025 (HB 352, Chapter 604) took effect for tax years beginning after December 31, 2024, so everything in it is in its second year on the 2026 return. Nothing in it changed for 2026 except the standard deduction, which it made flat and then indexed.

• Two new top brackets. 6.25% on Maryland taxable income over $500,000 single / $600,000 joint, and 6.5% over $1,000,000 / $1,200,000. The old 5.75% bracket, which used to run to the top, is now capped at $500,000 / $600,000. Everyone below $100,000 single / $150,000 joint still pays 4.75% on the bulk of their income, and the rates are not indexed.
• The 2% capital gains surcharge. An individual with federal AGI over $350,000, any filing status, pays an extra 2% on net capital gain included in Maryland income, figured on Form 502CG and entered on Form 502 Line 21b. It is a cliff: $349,999 of AGI owes nothing, $350,001 owes 2% of all the gain. Excepted are gain on a primary residence sold for under $1,500,000, gain inside retirement accounts, farm livestock, land under conservation easements, §179 property and nonprofit affordable housing. Gain deferred under §1031 is not in AGI and escapes it.
• The flat standard deduction. $3,350 single / married filing separately / dependent and $6,700 joint / head of household / qualifying surviving spouse for 2025, replacing the old 15%-of-income phase-in. From 2026 the figure is indexed for cost of living. The Comptroller has not announced the 2026 amount: its 2026 estimated-tax worksheet still prints $3,350 / $6,700, while the 2026 Employer Withholding Guide uses $3,400 single, which points to $3,400 / $6,800. Expect the answer in the 2026 Form 502 instructions.
• Itemized deductions cut above $200,000. Maryland itemized deductions (federal Schedule A less state and local income taxes) are reduced by 7.5% of federal AGI over $200,000, or over $100,000 married filing separately. At $300,000 of AGI the cut is $7,500. With the standard deduction this small, a household well over $200,000 can still come out ahead itemizing, but run both.

The county tax: a higher ceiling

Every county and Baltimore City adds its own income tax on Form 502 Line 28, on the same taxable income, at the rate of the county where you lived on December 31. The 2025 budget law raised the maximum a county may charge from 3.2% to 3.3% for tax years beginning after December 31, 2025. Dorchester went to 3.30% early, for 2025. For 2026 Kent moves from 3.20% to 3.30% and Allegany from 3.03% to 3.20%. Every other county’s rate is unchanged, from Worcester’s 2.25% to the 3.20% charged by Baltimore City and most of the large suburban counties; Anne Arundel and Frederick keep their graduated local brackets, and nonresidents pay the 2.25% special rate instead. The full table is in Maryland figures at a glance.

What the 2026 General Assembly did

The session that ended in April 2026 was quiet on the individual side. The one big bill, the Budget Reconciliation and Financing Act of 2026 (SB 284, Chapter 6, signed April 8, 2026), was mostly about businesses. What reaches an ordinary filer:

• Public safety retirees. The subtraction for retired police, fire, rescue, EMS and correctional officers 55 or older rises from $15,000 to $16,000 for 2026, then $1,000 a year to $20,000 in 2030 (SB 607, Chapter 686). Form 502SU code v.
• Retired 9-1-1 specialists. New for 2026 through 2028: the same subtraction, plus a nonrefundable credit of 4.75% of the first $15,000 of that retirement income, up to $700, by certificate from the Department of Emergency Management (SB 148, Chapter 877).
• Teachers. The $250 classroom-supplies subtraction extends to publicly funded pre-K teachers for 2026 (HB 478, Chapter 61).
• Student loan borrowers. The Student Loan Debt Relief Tax Credit pool is cut to $9 million for tax year 2026, from $18 million, before returning to $18 million for 2027 (SB 284). Fewer applicants will get the credit, or smaller ones. Application to MHEC by September 15 is unchanged.
• Farmers and homeowners. The agricultural management equipment subtraction is broadened (HB 547, Chapter 327). Homeowners’ Property Tax Credit applications go year-round from 2027 (HB 1330, Chapter 782); for 2026 the April 15 and October 1 deadlines stand.
• Business owners. Manufacturers’ bonus depreciation capped at 20% and §168(n) permanently decoupled, both from 2026; the 2025 law’s pass-through entity changes delayed to 2027 with an opt-out (SB 284).

What did not pass. HB 707 would have let IRA distributions into the pension exclusion and phased the exclusion to 100% of retirement income; it died in committee, so IRA withdrawals and Roth conversions remain fully taxed. HB 411 would have raised the standard deduction; it died. HB 926 would have disallowed the first $10,000 of property tax as a Maryland itemized deduction; it died. HB 880 would have kept Maryland decoupled from §174A and §163(j) for 2026; it died, so Maryland conforms. No bill to create Maryland deductions for tips or overtime got out of committee.

Enacted for 2027, not 2026. A refundable $1,000 credit for the parent of a stillborn child (HB 547) and county-optional child tax credits or grants for families who receive the state child tax credit (HB 363, Chapter 204). Neither is on the 2026 return.

Figures that moved

Not moving: the brackets, the $3,200 exemption and its phase-out lines, the senior tax credit of $1,000 / $1,750 (the Comptroller has not invoked the revenue-shortfall trigger that would cut it), the EITC percentages, the $500 child tax credit, the $2,500 529 subtraction, the $5,000,000 estate tax exclusion, the 10% inheritance tax.

The pension exclusion cap is the one that will surprise retirees. It tracks the maximum Social Security benefit under a formula in the statute, and for 2026 it falls to $40,600 from $41,200, according to Comptroller guidance issued April 8, 2026 and reported in the tax press (verify against the 2026 Pension Exclusion Worksheet when published). A retiree with a $45,000 pension and $30,000 of Social Security excludes $10,600 instead of $11,200, which is about $48 more in state and county tax. Small, but in the wrong direction. The rules are in Maryland for retirees.

Maryland Tax Connect replaces iFile

On September 1, 2026 the Comptroller launched Maryland Tax Connect for individuals at mdtaxconnect.gov, replacing iFile and the old online bill-payment system. The 2027 filing season is the first one run entirely on it. Form 502 can be filed there free, interview-style, with payments, payment plans, refund status, account balances, filing history and notices in the same place; some payments need no account. It does not file the federal return. IRS Direct File, which Maryland joined for the 2025 season, is not available. Anyone with a bookmark to iFile needs a new one.

No tax question on the ballot

The three statewide questions on the November 3, 2026 ballot concerned state-employee labor agreements, the Commission on Judicial Disabilities and redistricting. None is a tax measure. Two local questions touch taxes: Prince George’s County Question A would let the county impose taxes and fees on certain businesses without a public vote, and Baltimore City Question I would dedicate $0.03 per $100 of taxable property value to a Baby Fund. Neither changes the income tax return; the county and city boards of elections have the results.