Maryland Pension Exclusion 2025
Maryland allows retirees to exclude a portion of their pension and retirement income from state income tax. For 2025, the maximum exclusion is $34,000 for single filers (age 65 or older or totally disabled) and $43,200 for married couples filing jointly when both spouses are 65+ or disabled. These amounts are adjusted annually for inflation; confirm the exact figures with the Maryland Comptroller before filing.
The exclusion is a subtraction from federal adjusted gross income (AGI) on your Maryland return. It reduces only state income tax — your pension remains taxable at the federal level.
What This Means for Your Tax Bill
The practical effect: if you have $50,000 in taxable pension income as a single filer age 67, you’ll owe Maryland state tax on only $16,000. At Maryland’s top marginal state income tax rate of 5.75%, that saves you about $1,955 in state tax. Your next step is to gather all 1099-R forms, calculate total qualified distributions, and prepare to enter the exclusion on Form 502, Line 11. Do not include Social Security or Roth IRA distributions — they are already state-tax-free and don’t count toward the cap.
Comparison with neighboring states: Maryland’s exclusion is more generous than Virginia’s (which offers no general pension exclusion for most retirees) but less generous than Pennsylvania’s (which fully exempts most retirement income, including pensions and 401(k) withdrawals). The District of Columbia taxes pension income but allows a $12,000 exclusion for taxpayers age 65+ (less than Maryland’s $34,000). If you relocate across state lines, the prorated rules change — see below.
Who Qualifies — and When the Rules Change
You can take the full exclusion if you meet one of these conditions:
- Age 65 or older by the end of the tax year, or
- Totally and permanently disabled (as defined by the Social Security Administration or equivalent employer plan documentation).
For a joint return, each spouse must meet the age or disability requirement to claim the higher married-couple limit ($43,200). If only one spouse qualifies, the cap is the single-filer limit ($34,000). This is the key boundary: if you and your spouse have a combined pension of $80,000 but only one of you is 65+, you can exclude only $34,000 — a difference of $9,200 in taxable income compared to what you might expect.
Part-year and nonresidents: If you moved into or out of Maryland during the year, the exclusion is prorated based on the portion of your retirement income that was received while you were a Maryland resident. For example, if you moved to Maryland in July and received $40,000 in pension income evenly over the year, only the $20,000 received after your move qualifies for the exclusion. You would then apply the cap proportionally (e.g., 50% of $34,000 = $17,000 maximum exclusion). Check the Comptroller’s instructions for the specific allocation formula — the proration method changed in 2023 and the current form may use a daily or monthly ratio.
What Retirement Income Counts
The exclusion applies to taxable distributions from:
- Qualified employer pension, profit-sharing, or stock bonus plans (including 401(k) and 403(b) plans)
- Individual retirement accounts (IRAs and Roth IRAs — only the taxable portion)
- Military retirement pay
- Federal civil service retirement (CSRS and FERS)
- State and local government pensions (including Maryland State Retirement and Pension System)
- Certain deferred compensation plans (e.g., 457(b) plans)
Does not apply to:
- Social Security benefits (already exempt from Maryland tax)
- Early withdrawals from retirement accounts before age 59½ (may be subject to penalty and are not eligible for the exclusion — even if disabled, unless the disability qualifies as total and permanent under SSD rules)
- Roth IRA qualified distributions (already tax-free at the state level)
- Nonqualified deferred compensation plans (e.g., rabbi trusts)
- Lump-sum distributions from nonqualified plans that are not part of a qualified retirement system
How to Claim the Exclusion — Verification Step
1. Complete your Maryland Form 502 (Resident Income Tax Return).
2. Enter the eligible pension/retirement income amount on Line 11 – Subtractions (or the specific pension exclusion line on the form). Use Schedule 1 if required.
3. Verify the current-year exclusion limit by visiting the Maryland Comptroller’s official website (www.marylandtaxes.gov) and searching “pension exclusion.” Do not rely on last year’s number — inflation adjustments can shift the cap. The 2024 limit was $32,200 single / $41,800 joint; the 2025 figures above are estimates based on the same index.
Attach a statement listing the source(s), amount, and proof of age or disability (e.g., birth date, disability award letter) — keep for your records; do not mail unless requested. If you file electronically, the software may prompt you for this documentation; save a PDF of your response.
Common Mismatches and Traps
Mismatch 1: Double-dipping subtractions. You cannot claim the pension exclusion and a separate Maryland subtraction for the same income (e.g., a military retirement subtraction). Choose the subtraction that gives you the larger benefit — they stack only if the income qualifies for different types (e.g., Social Security and pension are separate).
Mismatch 2: Early withdrawals before 59½ not eligible. If you took a hardship withdrawal or an early distribution from a 401(k) at age 55, that income is not eligible for the pension exclusion — even if you are over 65. The exclusion applies only to qualified distributions that would be federally taxable and are part of a retirement plan. Nonqualified distributions are taxed without the cap.
Mismatch 3: Combining multiple pension sources under one cap. The exclusion is per return, not per plan. If you receive $40,000 from a state pension and $10,000 from an IRA, the total before the cap is $50,000. You subtract only the cap amount, not both individually. Do not fall into the trap of treating each 1099-R as separate.
Mismatch 4: Part-year proration overlooked. Retirees who move during the year often forget to prorate the exclusion. Even if you lived in Maryland for only three months, you must reduce the cap by the ratio of Maryland-sourced income to total retirement income. Use the worksheet in the Form 502 instructions.
Expert Tips & Common Mistakes
Tip 1: Document Your Age or Disability
- Action: Attach a brief statement with your return indicating your birth date (if 65+) or a copy of your disability determination letter.
- Common mistake: Assuming the exclusion is automatic. Maryland may disallow it if you don’t provide supporting documentation when audited.
Tip 2: Combine Multiple Pension Sources Correctly
- Action: Add up all qualified retirement distributions (pensions, IRA withdrawals, 401(k) payments) before applying the cap. The exclusion applies to the total, not per account.
- Common mistake: Thinking you can exclude $34,000 from each pension source. The cap is per return, not per plan.
Tip 3: Don’t Include Roth IRA Distributions
- Action: Report only taxable retirement income. Roth IRA distributions that are already federally tax-free are also tax-free in Maryland — but they don’t count toward your pension exclusion cap.
- Common mistake: Adding nontaxable Roth distributions to your total, which wastes part of the exclusion limit that could be used for other taxable income.
Quick Decision Aid
Use this checklist to confirm you can claim the Maryland Pension Exclusion for 2025:
- [ ] You are age 65+ or totally disabled (or your spouse meets the condition for joint filers).
- [ ] You received taxable distributions from a qualified retirement plan, IRA, or government pension.
- [ ] The total amount of those distributions is at least the exclusion limit (if less, you can exclude the full amount).
- [ ] You have not already subtracted the same income as a different Maryland subtraction (e.g., military retirement subtraction).
- [ ] You are filing Maryland Form 502 and will enter the exclusion on the correct line.
If all boxes are checked, proceed with your return. If unsure about any item, consult the Maryland Comptroller’s instructions or a tax professional.
Practical Examples
| Filing Status | Total Pension Income | Exclusion (2025 est.) | Taxable at State Level |
|---|---|---|---|
| Single, age 67 | $50,000 | $34,000 | $16,000 |
| Joint, both 70 | $80,000 | $43,200 | $36,800 |
| Joint, only one 68 | $60,000 | $34,000 | $26,000 |
| Part-year resident (moved to MD in July), single, age 66, $40,000 total pension | $20,000 while resident | $17,000 (prorated cap) | $3,000 |
Important Caveats
- Tax laws change. The 2025 figures above are estimates based on prior-year inflation adjustments; always verify with Maryland Comptroller’s website before filing.
- The exclusion does not apply to nonqualified distributions (e.g., hardship withdrawals, loans treated as distributions) or to Social Security.
- If you are a part-year resident or nonresident, the exclusion may be prorated based on the portion of income sourced to Maryland.
- This article provides general information and is not tax or legal advice. For personalized advice, consult a tax professional familiar with Maryland state law.
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Michael Reynolds is a retirement benefits researcher and the lead author at Pension FAQ. With over 12 years of experience analyzing employer pension plans, state retirement systems, and Social Security policy, he specializes in translating complex pension rules into clear, actionable guidance for American workers and retirees.
Michael holds a Bachelor’s in Economics from the University of Michigan and has completed the Certified Retirement Counselor (CRC) program. His work has been cited by financial planners and HR professionals helping employees navigate their pension options.
At Pension FAQ, Michael leads a team covering employer plan access, state pension taxation, teacher and public employee retirement systems, professional sports pensions, and pension calculation rules. All content is rigorously reviewed against official plan documents and IRS guidelines.
Disclaimer: Pension FAQ content is for educational purposes only and does not constitute financial, tax, legal, or retirement benefits advice. Always consult your plan administrator or a qualified professional for decisions about your specific situation.