Maryland does not tax most pension income, but the rules depend on your age and the source of the pension

Maryland excludes most pension and retirement distributions from state income tax if you are 55 or older. This applies to pensions from your employer, military service, and certain other sources. However, the exclusion does not cover all retirement income — Social Security, IRAs, and 401(k) withdrawals have different treatment. The key is understanding which income qualifies and what documentation you need when you file.

If you are under 55, Maryland taxes your pension income at the standard state rate, which ranges from 5.75% to 5.85% depending on your total income. Once you turn 55, you can exclude up to $31,100 per year of pension income (as of 2024; this amount adjusts annually). If your pension exceeds that cap, only the amount over the limit is taxed.

Key Takeaways

  • Maryland excludes up to $31,100 per year of pension income from state tax if you are 55 or older, but taxes all pension income if you are under 55.
  • The exclusion applies to employer pensions, military pensions, and certain government retirement benefits, but not to Social Security, IRA withdrawals, or 401(k) distributions.
  • You do not need to file a separate form to claim the exclusion — you report it on your Maryland tax return by entering the excluded amount on the appropriate line.
  • If you receive both a pension and Social Security, only the pension counts toward the $31,100 exclusion; Social Security is handled separately.

Which types of retirement income may have access to for the Maryland exclusion

The Maryland pension exclusion covers income from a may have access to pension or annuity — meaning payments from an employer retirement plan, a union pension, or a government employee retirement system. This includes pensions from private employers, state and local government jobs, and military service. The payment must be periodic (monthly, quarterly, or annual), not a lump sum.

Income that does not may have access to includes distributions from IRAs, 401(k)s, 403(b)s, and other self-directed retirement accounts. Social Security benefits are also excluded from the pension exclusion, though Maryland does not tax Social Security at all. If you receive a lump-sum distribution from a pension plan rather than ongoing payments, that amount is taxable in the year you receive it, even if you are 55 or older.

Inherited pensions and survivor benefits paid to a spouse or dependent also may have access to for the exclusion if the recipient is 55 or older. If you are the beneficiary of a deceased spouse's pension, you can exclude up to $31,100 per year of those payments.

How the $31,100 annual exclusion works

The $31,100 limit is per person, not per household. If you are married and both you and your spouse receive pensions, each of you can exclude up to $31,100. If one spouse receives a $40,000 annual pension and the other receives $25,000, the first spouse pays tax on $8,900 ($40,000 minus $31,100) and the second spouse pays no tax.

The exclusion applies only to the pension itself, not to other income. If you have a pension of $30,000 and wages of $20,000, you exclude the full $30,000 of pension income and pay tax on the $20,000 in wages. The $31,100 limit does not reduce your taxable wages or other income sources.

The exclusion amount changes each year. Maryland adjusts it annually based on inflation. You can find the current year's limit on the Maryland Department of Revenue website or on the instructions to Form 502 (Maryland Individual Income Tax Return). When you file your return, you will enter your total pension income and then subtract the exclusion amount on the line designated for pension exclusion.

What you need to report on your Maryland tax return

You report pension income on your Maryland return using Form 502 (the state income tax return) along with Schedule A if you have other income sources. Your pension provider will send you a 1099-R form showing the amount paid to you during the year. You use this figure as your starting point.

On Form 502, you enter your total pension income from the 1099-R. Then, on the line for pension exclusion (the form instructions specify which line), you enter the amount you are excluding — up to $31,100 if you are 55 or older. The result is your taxable pension income. If your pension is less than $31,100, you exclude all of it and report zero taxable pension income from that source.

You do not need a separate form or letter from your employer to claim the exclusion. The exclusion is automatic if you meet the age requirement and report it correctly on your return. However, you should keep a copy of your 1099-R and any pension statements showing the amount paid, in case Maryland requests documentation.

How military pensions are treated

Military pensions receive the same treatment as civilian employer pensions under Maryland law. If you are 55 or older and receiving a military retirement pension, you can exclude up to $31,100 per year. The pension must be from active-duty service, reserve service, or the National Guard — not from the Veterans Administration (VA) disability compensation, which is handled differently).

If you receive both a military pension and VA disability compensation, only the military pension counts toward the $31,100 exclusion. VA disability payments are not taxable by Maryland or the federal government, so they do not reduce your exclusion amount and do not add to your taxable income.

Social Security and other retirement income that Maryland does not tax

Maryland does not tax Social Security benefits at any age or income level. This is separate from the pension exclusion. You do not report Social Security on your Maryland return, and it does not reduce the amount of pension income you can exclude.

However, if you receive both a pension and Social Security, you may still owe federal income tax on a portion of your Social Security, depending on your combined income. Maryland's lack of a tax on Social Security does not affect your federal return.

Other income that is not taxed by Maryland includes certain railroad retirement benefits and some government employee benefits. If you are unsure whether a specific payment is taxable, contact the Maryland Department of Revenue or consult a tax preparer familiar with Maryland rules.

What happens if your pension income exceeds the exclusion limit

If your annual pension is $35,000 and you are 55 or older, you exclude $31,100 and pay Maryland tax on $3,900. The tax rate applied to that $3,900 depends on your total income for the year. Maryland's tax brackets range from 5.75% to 5.85%, so you would owe roughly $225 to $330 in state tax on the excess pension income.

The exclusion does not carry over to the next year. If you do not use the full $31,100 in one year — for example, if you received only $25,000 in pension payments — you cannot save the unused $6,100 to exclude in a future year. Each year stands alone.

If you receive multiple pensions (for example, from two different employers or from both a civilian and military career), you can combine them and apply the $31,100 exclusion to the total. You are not required to allocate the exclusion to one pension over another.

Frequently Asked Questions

Do I have to be a Maryland resident to use the pension exclusion?

Yes. You must be a Maryland resident for the entire tax year to claim the exclusion. If you moved to Maryland partway through the year, you file a part-year resident return and can only exclude the pension income received during the months you were a resident. If you moved out of Maryland, you cannot claim the exclusion on income received after you left.

What if I turned 55 partway through the year?

You can claim the exclusion for the entire year if you are 55 on or before December 31. You do not have to be 55 for the full year. If you turn 55 on December 15, you can exclude up to $31,100 of pension income received during the entire calendar year, including the months before your birthday.

Can I exclude a lump-sum pension distribution?

No. The exclusion applies only to periodic pension payments (monthly, quarterly, or annual). If you take a lump-sum distribution from a pension plan, the entire amount is taxable in the year you receive it, regardless of your age. Some people roll lump-sum distributions into an IRA to defer taxation, but that strategy involves federal rules and should be discussed with a tax professional.

Does the pension exclusion affect my may be able to access for other Maryland benefits or credits?

The exclusion reduces your Maryland taxable income but does not change your federal taxable income. Some state benefits are based on federal income, so the exclusion may not help with those programs. If you receive means-tested benefits like Medicaid or housing assistance, check with the administering agency about how Maryland's pension exclusion affects your case.

What if I have questions about whether my specific income qualifies?

Contact the Maryland Department of Revenue at 410-260-7980 or visit their website. You can also work with a tax preparer or CPA who is familiar with Maryland tax law. The Department of Revenue publishes detailed instructions with Form 502 each year that explain which types of income may have access to for the exclusion.