The Budget Reconciliation and Financing Act of 2025 was passed on May 20, 2025. The new legislation makes several updates to Maryland tax law. Here is a summary of the significant provisions:

Increasing Top Marginal Tax Rates for Individuals

Previously, Maryland’s top tax rate for individuals was 5.75% for taxable income exceeding $250,000. For tax years beginning after December 31, 2024, Maryland has added two additional tax brackets for individuals earning over $500,000 of taxable income.

A county/local tax increase is also permitted beginning January 1, 2025, to a top rate of 3.3% (formerly 3.2%). This must be approved at the county level. For this year, Montgomery County, Maryland, rejected this increase in their budget negotiations, therefore maintaining a top local income tax rate of 3.2% for the 2025 tax year.

Net Capital Gains Surcharge

In addition to the tax rate increases, Maryland will charge individuals with a federal adjusted gross income in excess of $350,000 an additional 2% tax on the net capital gains that are included in their Maryland Adjusted Gross income. The 2% surtax will not apply to certain specified assets, such as: primary residences sold for less than $1.5m, assets held in a retirement account, property used in a trade or business in which the cost is deductible under IRC Section 179, and other certain asset categories

Standard Deduction

The standard deduction for single taxpayers has increased from $2,250 to $3,350. The standard deduction for married filing jointly taxpayers has increased from $4,500 to $6,700.

Itemized Deductions

For all tax years after 2025, when Federal Adjusted Gross Income exceeds stated thresholds, the amount of itemized deductions allowable will be limited. For married filing separately taxpayers, itemized deductions will be limited for taxpayers with Federal Adjusted Gross Income exceeding $100,000. For all other filing statues, itemized deductions will be limited when Federal Adjusted Gross income exceeds $200,000. For taxpayers exceeding the Federal Adjusted Gross income thresholds, itemized deductions will be reduced by 7.5% of the excess of Federal Adjusted Gross Income over the stated threshold.

Ex: Maria, a single filer, has a Federal Adjusted Gross Income of $300,000 for 2025 and $50,000 of itemized deductions from charitable contributions. For tax year 2025, Maria’s Maryland Itemized deductions will be limited by $7,500 (($300,000 – $200,000) x 7.5%), giving her Maryland itemized deductions totaling $42,500.

Entity-Level Income tax Apportionment

For all taxable years after December 31, 2025, Maryland’s legislation distinguished Pass-Through Entity taxable income for resident and non-resident pass-through entity owners:

1. For Maryland Residents-Members: ass-through Entity taxable income is equal to the member’s pro-rata share of the entity’s federal adjusted gross income before deducting state taxes.
2. For Maryland Non-Resident Members: Pass-through entity taxable income remains tied to Maryland-sourced income.

The new tax legislation in Maryland’s Budget bill increases tax rates and new taxes for high-income earners who reside in Maryland. With new and increased taxes, proper tax planning is even more critical to avoid an unexpected Maryland tax due. Please contact our team to assist with tax strategy.