2025 Maryland Tax Law Changes
While the national focus is on the federal tax changes proposed in the One Big Beautiful Bill Act, Maryland has quietly implemented their own tax changes beginning in 2025. Maryland’s new Budget Reconciliation & Financing Act of 2025 (HB 352) rewrites large chunks of the individual income-tax code, most of them aimed squarely at taxpayers who are already in or heading toward the top brackets. These changes have been finalized and are effective beginning with the 2025 tax year. Here’s a summary of the major changes.
Two New Top Brackets - Single taxpayers with Maryland taxable income over $500k and joint filers with Maryland taxable income over $600k will be subject to higher tax rates in 2025. See the chart below for these new rates.
2% Capital Gains Surtax - All taxpayers, regardless of filing status, will face a new 2% surtax on net capital gains once their Federal Adjusted Gross Income (AGI) exceeds $350,000. The net capital gain is determined at the federal level and includes gains from pass-through entities. There are several exclusions listed below:
Standard Deduction Increase - The standard deduction will be increased from $2,800 to $3,350 for single and married filing separate taxpayers. It will be increased from $5,650 to $6,700 for married filing joint and Head of Household taxpayers.
Itemized Deduction Phaseout - There will be a new phaseout of itemized deductions that starts at $100,000 of Federal AGI for married filing separate taxpayers and $200,000 of Federal AGI for everyone else. The phaseout is 7.5% of each additional dollar of income over the limit. Here are two examples of how this will work in practice for any taxpayer who is not married filing separately:
- Federal AGI = $250,000
- Itemized Deductions before phaseout = $25,000
- Excess Income over AGI limitation = $50,000
- 7.5% Phaseout = $3,750
- Allowed Itemized Deductions = $21,250
- Federal AGI = $500,000
- Itemized Deductions before phaseout = $50,000
- Excess Income over AGI limitation = $300,000
- 7.5% Phaseout = $22,500
- Allowed MD Itemized Deductions = $27,500
Increased County Tax Limit - In addition to the state income tax, individual Maryland counties assess their own “piggyback” tax rate on income, which varies. Prior to the new bill, the maximum rate a county could charge was 3.2%. This maximum rate has been increased to 3.3%. Below is a list of current county tax rates. No counties have announced an increase yet, but Montgomery County has proposed an increase to 3.3%. Here’s a summary of the current tax rates by county:
Pass-Through Entity Tax Change - Pass-Through entities are currently allowed to pay Maryland tax on income sourced to Maryland on behalf of their owners. This is a workaround to the state and local tax (SALT) deduction cap that was implemented under the TCJA in 2017. Beginning in 2026, these entities will be able to pay Maryland income tax on ALL distributive income on behalf of their owners, regardless of the source. However, this could become a moot point if the current version of the proposed Federal tax abill is moved forward, as it eliminates the ability for pass-through entities to deduct state taxes at all.
Maryland recently hosted a series of webinars to discuss these changes, and they are regularly posting updates on this website as more guidance is released. Our tax planning software programs have not been updated to reflect these changes yet, but we anticipate they will be updated in the near future.
If you have questions about how these changes will impact your tax situation, feel free to reach out to us.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.