Maryland Pension Exclusion
If you are 65 or older or totally disabled (or your spouse is totally disabled), you may qualify for Maryland's maximum pension exclusion of $34,300* under the conditions described in Instruction 13 of the Maryland resident tax booklet. If you're eligible, you may be able to subtract some of your taxable pension and retirement annuity income from your federal adjusted gross income.
*For calendar year 2021. For calendar year 2022, the maximum pension exclusion is $34,300 (remains the same amount as calendar year 2021).
This subtraction applies only if:
- You were 65 or older or totally disabled, or your spouse was totally disabled, on the last day of the tax year; and
- You included on your federal return income received as a pension, annuity or endowment from an "employee retirement system." Please note that these include qualified defined benefit and defined contribution pension plans, 401(a) plans, 401(k) plans, 403(b) plans, and 457(b) plans.
- A traditional IRA, a Roth IRA, a simplified employee plan (SEP), a Keogh Plan or an ineligible deferred compensation plan does not qualify.
Complete the Pension Exclusion Computation Worksheet (13A) shown in Instruction 13 in the Maryland resident tax booklet. Be sure to report all benefits received under the Social Security Act and/or Railroad Retirement Act on line 3 of the pension exclusion worksheet - not just those benefits you included in your federal adjusted gross income.
To receive the benefit of the pension exclusion, be sure to transfer the amount from line 5 of the worksheet to line 10a of Form 502, and complete the remainder of your return, following the line-by-line instructions.
Please also note that any Social Security benefits you are receiving will count against the pension exclusion amount.
For example, Juanita is receiving a widow's survivor benefit of $30,000 from Social Security (she's waiting until 70 to claim her own, larger benefit). So for this year, she has an additional $4,300 that she can take out of her 401K and not pay Maryland state taxes. Cheryl is retired and has created a "retirement paycheck" from her former employer's 403b and the first $34,300 she takes out of that account won't have any Maryland taxes assessed. She'll still pay Federal taxes on the amount, as will Juanita on hers.
If either of them take money out of their IRAs, they will pay Maryland and Federal taxes on the entire amount as IRAs don't qualify for Maryland's pension exclusion. Before you "rollover" your employer plan (TSP, 401K, or 403b) into a rollover IRA, be sure you consider the benefits of the Maryland pension exclusion.
If you are a resident of another state, check out your state's tax rules on retirement distributions to ensure you are getting the most out of your tax breaks.