Maryland Tax Updates for 2025–2026: What Businesses and Families Need to Know

Why Maryland’s New Rules Deserve Attention

While federal tax law often grabs headlines, Maryland’s own tax rules play a major role in your total bill—especially if you are a higher‑earning resident, have significant investment income, or own a small business. Recent legislation introduces:

• • Higher tax rates for top‑bracket individuals.
• • A new surcharge on certain capital gains above specific income levels.
• • Changes to the pass‑through entity tax (PTET) and how income is taxed at the entity and owner levels.
• • A new sales tax on certain technology‑related services, taking effect later in 2025.

Understanding these developments now can help you make smarter decisions about income timing, investments, and business structure.

Higher Maryland Income Tax Rates for Top Earners

Beginning with the 2025 tax year, Maryland has introduced new brackets and higher rates for very high‑income taxpayers.

Key Features

• New top state rates apply once taxable income exceeds certain thresholds (for example, above the upper end of the traditional brackets), with higher percentages kicking in for income over $500,000 or $1 million, depending on filing status.
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• Counties may also adjust their local income tax rates, with the maximum local rate increasing modestly.
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• Combined state and local rates for top earners can now be notably higher than in prior years.

What This Means in Practice

• If your income regularly or occasionally exceeds these thresholds—because of bonuses, business income, or large capital gains—your marginal Maryland tax rate on the last dollars of income could now be meaningfully higher.
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• Timing matters more: spreading a large income event over multiple years may reduce exposure to the highest brackets.

For high‑earning professionals and business owners, year‑end planning around bonuses, distributions, and stock sales is more important than ever.

Maryland Capital Gains Surcharge for High-Income Taxpayers

Maryland has also added a 2% surtax on certain net capital gains for higher‑income residents beginning with tax years after December 31, 2024.

Who Is Affected

•  • Individuals with federal adjusted gross income (AGI) above specific thresholds (for example, $350,000 for many single filers, with higher thresholds for joint filers).
•  • Taxpayers with significant realized capital gains from the sale of investments, businesses, or real estate.

Exclusions and Exceptions

•  • Certain capital gains—such as those from the sale of a primary residence below a specified amount—may be exempt from the surcharge.
•  • The surtax is layered on top of existing Maryland income tax, increasing the effective tax rate on affected gains.

Planning Considerations

•  • The timing of sales is now more important for Maryland residents with substantial investments or business interests.
•  • It may make sense to coordinate federal capital gains planning with Maryland’s new surcharge, potentially spreading gains over multiple years, using installment sales, or harvesting losses where appropriate.

If you are considering a significant sale in the next few years, it is wise to model after‑tax outcomes under the new Maryland rules before you sign a purchase agreement.

Changes to Pass-Through Entity Tax (PTET)

Maryland’s elective pass‑through entity tax (PTET) allows S corporations and partnerships to pay Maryland income tax at the entity level on behalf of certain owners. Recent updates affect both the rate and, in future years, the base used for resident owners.

PTET Rate Adjustments

• Following increases in Maryland’s top individual rate, the PTET rate applied to many individual and fiduciary owners has increased as well.
• This means PTET payments made by eligible S corporations and partnerships can be larger than in prior years, but they may also deliver more federal tax benefit, depending on your situation.

Future Base Changes for Resident Owners

• For tax years beginning after December 31, 2025 (returns filed for 2026 and beyond), Maryland will modify how PTET is computed for resident members.
• Instead of using only Maryland‑sourced income after apportionment, the calculation may rely more directly on each resident owner’s full share of entity income.
• This change can significantly increase PTET for multi‑state businesses with Maryland resident owners.

Even though the full base changes apply to future years, it is important during the 2025–2026 filing season to:

• • Confirm whether a PTET election was made.
• • Review whether PTET is still the right answer based on updated rates.
• • Begin planning for how the upcoming base changes could affect 2026 and later years.

Updates to Deductions and Local Rates

Maryland’s law changes also touch on deductions and local income tax rates.

Standard and Itemized Deductions

• The standard deduction has increased, with additional cost‑of‑living adjustments scheduled going forward.
• For higher‑income taxpayers, Maryland itemized deductions may be partially phased out once federal AGI exceeds certain thresholds (for example, around $200,000 for many filers).
• This phase‑out reduces the benefit of itemizing for some households, particularly those with large mortgage interest or charitable contributions.

Local Income Tax Changes

• The maximum local income tax rate has increased slightly, giving counties more flexibility to raise rates.
• Your actual local rate depends on where you live; in some jurisdictions, your combined state and local rate may now be materially higher than before.

These changes make it even more important to look at your full Maryland picture—state and local—when doing tax planning.

New Maryland Sales Tax on Certain Technology Services (Effective Mid-2025)

Looking slightly ahead, Maryland will begin applying a 3% sales and use tax to certain technology‑related services starting in mid‑2025.

Who Should Pay Attention

•  • Businesses providing certain data processing, hosting, cloud, or software‑related services that fall within specified NAICS codes.
•  • Companies that purchase a significant volume of these services from Maryland providers.

What to Do Now

• 1. Review your service offerings and contracts. Determine whether you sell services that may fall under the new rules.
• 2. Check your invoices. Make sure sales tax is being charged and collected correctly where required once the rules take effect.
• 3. Coordinate with your accountant and sales systems. Ensure your billing software and accounting processes can handle the new tax categories.

While this change may not affect every business, those in tech‑adjacent industries should prepare early rather than waiting until the first taxable invoice is due.

Practical Steps for Maryland Residents and Small Businesses

To navigate Maryland’s 2025–2026 tax landscape more confidently:

•  • Understand which changes apply to you. Not every new rule affects every taxpayer. Focus on your income level, investment plans, and business activities.
•  • Model high‑income and capital gains scenarios. If you anticipate being in the top brackets or realizing large gains, run projections that incorporate the new state rates and surcharges.
•  • Review your PTET strategy. For S corporations and partnerships with Maryland resident owners, re‑evaluate whether PTET elections still make sense under the new rate structure and upcoming base rules.
•  • Coordinate federal and Maryland planning. Federal SALT rules, Maryland PTET, and local tax changes all interact—you may want to adjust withholding, estimated payments, or investment timing.
•  • Update your entity and compensation planning. The combined effect of federal and Maryland rules may change the relative appeal of different entity types or compensation mixes for owners.

How AllTax Can Help

Maryland’s new tax rules are landing on top of an already complicated federal system, which can make it hard to know which changes truly matter for you and which are just noise.

AllTax can help you:

• Clarify how Maryland’s new brackets, surcharges, and deduction rules affect your household or business.

• Run “what‑if” projections for capital gains, business sales, or large bonuses so you can better time major income events.

• Reevaluate your PTET and overall entity structure in light of both Maryland and federal developments.

• Coordinate tax planning across federal, Maryland, and local levels so your total bill is more predictable and manageable.

If you’d like a Maryland‑focused review before or during the 2026 filing season, contact AllTax Accounting. We’ll explain the new rules in plain language and work with you to create a practical plan tailored to your situation.

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  Schedule a Consultation or Learn More About Our Services

  Stay ahead of legislative changes and protect your financial future with proactive planning. Contact AllTax Accounting today to schedule a consultation or explore our Maryland tax planning and advisory services, so you’re fully prepared for the 2025–2026 tax seasons.

   
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