Maryland implemented a significant set of tax law changes during the 2025 legislative session aimed at addressing a budget shortfall. Many of these changes take effect for tax years starting January 1, 2025, meaning they will first appear on tax returns filed in 2026.
For households earning $250,000 or more, these updates may increase the overall state and local tax burden. Let’s review the changes and how they might affect your tax return and overall financial plan so you can stay proactive rather than reactive.
New Higher Income Tax Brackets
Maryland’s progressive income tax structure now includes two new top marginal brackets:
- 25% for income over $500,000 (single) or $600,000 (married filing jointly)
- 50% for income over $1,000,000 (single) or $1,200,000 (married filing jointly)
Previously, the top marginal rate was 5.75% for income above $250,000 for single filers and $300,000 for joint filers. While these higher rates apply only to income above each threshold, they will increase the total tax liability for higher-earning households.
Capital Gains Surtax for High Earners
Maryland has introduced a new 2% surtax on net capital gains for taxpayers with federal adjusted gross income exceeding $350,000.
This surtax is in addition to existing state income taxes and primarily affects households with significant investment activity, such as the sale of stocks, business interests, or investment real estate.
Limits on Itemized Deductions
Tax filers may also see a reduction in their itemized deductions. For taxpayers with federal adjusted gross income above $200,000 (or $100,000 for married filing separately), Maryland reduces allowable itemized deductions by 7.5% of the income above those thresholds.
This limitation effectively increases taxable income for higher earners and can reduce the value of deductions such as mortgage interest and charitable contributions at the state level.
Potential Increases in County Income Taxes
Maryland counties now have the authority to slightly increase their local income tax rates, with the maximum rate rising from 3.2% to 3.3%.
While not every county will increase taxes, households in jurisdictions that do could face a higher combined state and local tax rate. For high-income earners, even small increases at the margin can add up over time.
What These Changes Mean for Households Earning $250,000+
Households at or above this income level may feel the effects of these changes in several ways, including:
- Higher marginal tax rates, which can increase income tax liability as earnings rise
- A new capital gains surtax, making investment timing and gain-realization strategies more important than ever
- Reduced itemized deductions, potentially increasing taxable income even if spending and charitable giving remain unchanged
- Local tax increases, which could further raise the overall tax burden, depending on where you live
Planning Considerations
With these changes now in effect, proactive planning with an advisor who understands taxes is more important than ever. Consider the following strategies:
- Manage the timing of income and capital gains to help reduce exposure to higher tax rates
- Review charitable giving strategies to align philanthropic goals with potential tax benefits
- Coordinate tax planning with retirement and investment strategies for a more holistic approach
- Evaluate residency and local tax exposure, as state and local taxes can significantly affect your overall tax burden
If you’re unsure how these changes may impact your household — or how to plan around them — let’s talk! Reach out to start a conversation.