Maryland Legislature passes budget bill containing many tax changes

The Maryland Legislature passed the Budget Reconciliation and Financing Act of 2025 (2026 Budget Bill) on April 7 which currently sits with Maryland Gov. Wes Moore awaiting signature.

The 2026 Budget Bill makes several changes impacting high-income, individual taxpayers, the pass-through entity (PTE) tax calculation, and sales tax on taxable data and information technology services.

Certain originally proposed measures of the bill did not make it through to the final version. These measures include mandatory unitary reporting, a decrease to the corporate tax rate and a repeal of the state inheritance tax.

Individual income tax changes

The 2026 Budget Bill increases the tax rates for individuals in the top tax brackets. The current top tax rate is 5.75% of Maryland income exceeding $250,000 for individual filers. This bill retains that rate and imposes two new rates:

• 6.25% for individual taxable income between $500,001 and $1,000,000 (between $600,000 and $1,200,000 for joint filers); and
• 6.5% for individual taxable income above $1,000,000 (above $1,200,000 for joint filers).

Additionally, the bill increases the maximum allowable income tax rate that can be charged by a county from 3.2% to 3.3%.

The standard deduction increased from $2,250 to $3,350 for individuals and from $4,500 to $6,700 for joint filers. The legislation also reduces itemized deductions by 7.5% of the excess of federal adjusted gross income over $200,000 ($100,000 for married filing separate).

These changes take effect on July 1, 2025, and are applicable to tax years beginning after Dec. 31, 2024.

New capital gains tax surcharge

An individual with federal adjusted gross income above $350,000 and capital gain income in its Maryland adjusted gross income will be subject to an additional capital gain tax of 2%. There are several exceptions to this tax, including a primary residence sold for $1,500,000 or less, assets held in a cash or certain deferred arrangement plans, plans and property used in a trade or business and deductible under Section 179, among others.

These changes also take effect July 1, 2025, and are applicable to tax years beginning after Dec. 31, 2024.

PTE tax changes

The 2026 Budget Bill includes a change in the definition of pass-through taxable income for a resident member. Pass-through taxable income is defined as “the portion of a pass-through entity’s income under the federal Internal Revenue Code, calculated without regard to any deduction for taxes based on net income that are imposed by any state or political subdivision of a state, that is derived from or reasonably attributable to the trade or business of the pass-through entity in this State.”

This legislation retains that definition for nonresidents, for but for residents defines taxable income as “equal to the member’s distributive or pro rata shares of the pass-through entity.”

These changes to PTE tax take effect on Jan. 1, 2026, and are applicable for taxable years beginning after Dec. 31, 2025.

Sales tax on data and information technology services

The 2026 Budget Bill also includes a 3% sales tax on data and information technology services through an expansion of the definition of taxable services. A comprehensive update will be available in the coming weeks.

What’s next?

Gov. Wes Moore has 90 days to sign the bill after being presented with it by the House. In the meantime, taxpayers should consider the impacts of the individual income tax rate increase, standard and itemized deduction changes, pass-through entity tax changes and the new sales tax on data processing services as applicable.

If you have any questions, please reach out to your Baker Tilly state tax advisor.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.