Key Differences Between Federal and Maryland State Tax Laws

Understanding the key differences between federal and Maryland state tax laws is essential for residents and taxpayers who want to ensure compliance and optimize their tax obligations. While both federal and state tax systems aim to raise revenue for government services, they operate differently in various aspects.

1. Tax Rates

Federal income tax rates are structured progressively, with rates varying based on income brackets. As of 2023, the federal tax rates range from 10% to 37%. On the other hand, Maryland also employs a progressive tax system, but its state income tax rates range from 2% to 5.75%, depending on income levels. Additionally, Maryland has a local tax component, which can increase overall tax rates, as counties can impose their own income taxes that range from 2.25% to 3.2%.

2. Deductions and Credits

While the federal tax system allows for a variety of deductions, such as the standard deduction and itemized deductions, Maryland state taxes have their own set of deductions and credits. Maryland offers a standard deduction for state income tax, which as of 2023 is up to $2,350 for single filers and $4,700 for married couples filing jointly. Moreover, Maryland provides tax credits specifically for renters, individuals with disabilities, and low-income workers, which can help reduce the overall tax burden.

3. Tax Filing Requirements

Federal tax returns typically require taxpayers to file an annual return using IRS Form 1040. In contrast, Maryland has its own tax forms, including the Maryland Resident Income Tax Return (Form 505) for residents. While both require income reporting, Maryland also mandates that certain types of income, like pension income, must be reported differently than at the federal level.

4. Tax Year

Both the federal government and Maryland generally use the calendar year as the tax year; however, taxpayers need to be aware of varying deadlines for filing. For federal returns, the typical deadline is April 15. Maryland follows this same schedule but has provisions that may allow for an extension under specific circumstances, which can add complexity to the state filing process.

5. Alternative Minimum Tax (AMT)

The federal tax code includes an Alternative Minimum Tax (AMT) designed to ensure that high-income earners pay a minimum level of tax, even if they qualify for various deductions. Maryland does not have a similar AMT provision, making the Maryland state tax system more straightforward for certain high-income taxpayers.

6. Capital Gains Tax

Capital gains tax treatment also varies between federal and Maryland state tax laws. At the federal level, long-term capital gains are typically taxed at a lower rate, ranging from 0% to 20%, depending on the taxpayer's income. Maryland treats capital gains as regular income, which means they are subject to the state's income tax rates. This can result in a higher tax burden for Maryland residents when selling investments.

7. Estate and Inheritance Taxes

Another critical area of difference lies in estate and inheritance taxes. The federal government imposes an estate tax at the federal level, but it only applies to estates exceeding a specific threshold (over $12.92 million for individuals as of 2023). Maryland, however, imposes both an estate tax and an inheritance tax, making it one of the few states with such a dual-tax system. The Maryland estate tax begins to apply to estates valued over $5 million.

Conclusion

In summary, understanding the key differences between federal and Maryland state tax laws is crucial for effective tax planning. From varying tax rates and deductions to unique filing requirements and capital gains treatment, being informed can help taxpayers navigate the complexities of both systems, minimize their tax liability, and ensure compliance with both federal and state tax obligations.