Maryland Tax Update – Highlights of the Budget Reconciliation and Financing Act of 2025
Posted on June 02, 2025
Maryland’s Budget Reconciliation and Financing Act of 2025 (“The Bill”) has been signed into law, bringing tax changes that will begin taking effect for the 2025 tax year. It introduces higher income tax brackets for top earners, a capital gains surcharge, and makes an adjustment to resident pass-through entity taxation (“PTET”).
Individual Income Tax Changes
The Bill enacts modifications to Maryland’s personal income tax structure, particularly aimed at high-income earners. Effective for tax years starting after December 31, 2024, i.e., 2025 tax years, taxpayers with higher taxable income levels will face new brackets featuring increased tax rates.
Under the previous structure, Maryland’s top tax rate was 5.75% on taxable income exceeding $250,000 for individual filers (or $300,000 for certain joint filers). Now, while the 5.75% rate remains in place for middle- to upper-income brackets, there are two new top rates for those earning above $500,000 (individual) or $600,000 (joint). Specifically, income from $500,001 to $1,000,000 (individual) or $600,001 to $1,200,000 (joint) is taxed at 6.25%, while income above $1,000,000 (individual) or $1,200,000 (joint) is at 6.5%.
Accompanying these new rates is a 2% surcharge on net capital gains when an individual’s federal adjusted gross income exceeds $350,000. Assets qualifying for key exemptions can avoid the surcharge. For instance, if a primary residence is sold for $1.5 million or less, any resulting capital gain is excluded from the surcharge calculation, provided it meets the relevant eligibility rules. Additionally, certain gains from retirement accounts, assets expensed under Section 179 of the Internal Revenue Code, and various other special categories are also exempt from the surcharge.
The legislation does raise Maryland’s standard deduction from $2,250 to $3,350 for single taxpayers and from $4,500 to $6,700 for married couples filing jointly or head-of-household filers. However, itemized deductions are now reduced by 7.5% of an individual’s federal adjusted gross income that exceeds $100,000 (for married filing separately) or $200,000 (for other filers).
Beyond these changes at the state level, Maryland has authorized counties to further increase their local income tax rates. Counties can now raise income tax rates up to 3.3%, up from a previous maximum of 3.2%.
Pass-Through Entity Tax Calculation Revision
Effective January 1, 2026, PTE taxable income attributable to a resident owner is not restricted to Maryland-sourced income. Instead, for residents, taxable income is effectively all distributive or pro rata shares of the PTE’s federal adjusted income, calculated before deducting certain state taxes.
For nonresident owners, the PTE tax base remains tied to income derived from or reasonably attributable to the trade or business of the passthrough within Maryland. In other words, the existing sourcing rules still apply for non-resident owners.
Conclusion
Maryland’s Budget Reconciliation and Financing Act of 2025 comes with significant implications for some individuals. The introduction of higher income tax brackets, a capital gains surcharge, and revised pass-through entity tax rules are just a few of the highlights of a range of tax changes that are included in this Bill. Individuals potentially impacted by these Maryland tax changes should consider consulting with their Topel Forman advisor.
