Maryland taxpayers face several significant tax rule changes that became effective beginning with the 2025 tax year (for returns due during 2026), following legislation that was enacted as part of Maryland’s Budget Reconciliation Act of 2025.  High-income individuals, investors, and homeowners should pay close attention to how the new rules may affect their tax planning.

Below is an updated breakdown of the most important changes.

  1. New Income Tax Brackets for High-Income Taxpayers

Maryland added two new state income tax brackets for high-income taxpayers:

  • 6.25% for Single, Married Filing Separately, and Dependent filers with Maryland taxable income between $500,001 and $1,000,000, and for Married Filing Jointly, Head of Household, and Qualified Surviving Spouse filers with taxable income falling within the $600,001–$1,200,000 range.
  • 6.50% for Single, Married Filing Separately, and Dependent filers with Maryland taxable income over $1,000,000, and for Married Filing Jointly, Head of Household, and Qualified Surviving Spouse filers with taxable income over $1,200,000.

Planning Tip: Taxpayers expecting higher income from bonuses, stock compensation, or retirement distributions should evaluate estimated tax payments and withholding to avoid underpayment penalties.

  1. New Capital Gains Surtax for High-Income Residents

A new 2% surtax now applies to net capital gains for individuals with federal adjusted gross income (FAGI) over $350,000.  The surtax is imposed at the individual level and includes net capital gain received from pass-through entities.  Once FAGI exceeds $350,000, the 2% surtax applies to the taxpayer’s full net capital gain — not just the amount above the threshold — which can make income timing near the $350,000 line a meaningful planning lever.

Key points:

  • The surtax applies to sales of stocks, mutual funds, investment real estate, business interests, and other taxable capital assets.
  • Not all capital gains are subject to the surtax. For example, capital gains from the sale of a primary residence sold for less than $1,500,000 are excluded.
  1. Itemized Deduction Limits

Maryland introduced new limitations on itemized deductions for higher-income taxpayers. Beginning in tax year 2025, taxpayers with federal adjusted gross income (FAGI) above $200,000 ($100,000 if married filing separately) must reduce their itemized deductions by 7.5% of the excess over the threshold.

Important clarification:

  • The limitation is a phase-out calculation applicable to all itemized deductions, not a flat disallowance of the first $10,000 of state and local tax deductions.
  1. Standard Deduction Changes

To help reduce the financial impact on lower- and middle-income households, Maryland has increased the standard deduction for many taxpayers. The standard deduction is now $3,350 for Single, Married Filing Separately, and Dependent filers, and $6,700 for Married Filing Jointly, Head of Household, and Qualified Surviving Spouse filers. These amounts will be adjusted annually in the future based on cost-of-living increases.

  1. County Income Taxes: Structure Unchanged, but Some Rates Have Changed

While Maryland’s changes to its income tax rules are uniformly effective statewide, county income tax rates are still determined independently by each county. Several counties, including Anne Arundel, Calvert, Cecil, Dorchester, and St. Mary’s changed rates for 2025.  Others, like Allegany and Kent have updated their local income tax rates for the 2026 tax year.

  1. What Hasn’t Changed

Several common tax provisions remain unchanged:

  • Federal tax rules still determine much of your taxable income, except where Maryland law specifically decouples.
  • Maryland’s retirement income exclusions remain available for eligible taxpayers.
  • Existing credits, including the Earned Income Tax Credit, continue to provide tax relief for qualifying individuals.

Planning Opportunities for 2026

The new tax law makes planning more valuable than ever. Individuals may benefit from reviewing:

  • Timing of capital gains and investment sales
  • Roth conversion strategies
  • Charitable contribution planning
  • Retirement account withdrawals
  • Estimated tax payments
  • Income timing before year-end

Final Thoughts

Maryland’s 2026 tax law changes represent one of the state’s most significant tax overhauls in recent years. Individuals with higher incomes, substantial investment portfolios, or significant real estate holdings could see meaningful increases in their Maryland tax liability.

Because every taxpayer’s situation is unique, reviewing your tax strategy before year-end can help identify opportunities to reduce taxes and avoid surprises during the next filing season.

The changes described above stem from Maryland’s Fiscal Year 2026 budget legislation and apply primarily beginning with tax year 2025, which is filed during the 2026 tax filing season.

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