Maryland Military Retirement Tax Exemption: Complete 2026 Guide

Maryland is home to several major military installations, including Fort Meade, Joint Base Andrews, Aberdeen Proving Ground, and the U.S. Naval Academy. As a result, many military veterans choose to settle in the state after completing active duty service.

Historically, Maryland was considered a high-tax state for retirees. However, recent legislative adjustments have expanded tax exemptions for retired military personnel. If you receive a military pension, here is exactly how the Maryland Military Retirement Tax Exemption works for the 2026 tax year.

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Direct Answer: Is Military Retirement Taxed in Maryland?

Yes, but most veterans qualify for a substantial tax exemption.

Under Maryland tax law, retired military members can exclude a specific portion of their military retirement pay from both state and local (county) income taxes. The exemption limits are based on your age:

• Under Age 55: You can exempt the first $12,500 of your military retirement income.
• Age 55 or Older: You can exempt the first $20,000 of your military retirement income.

Any military pension income exceeding these thresholds is taxed at your ordinary Maryland state and county income tax rates.

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How the Exemption Works (HB 101 / SB 40 Rules)

This retirement exemption was established and expanded under Maryland House Bill 101 / Senate Bill 40 (effective for tax years 2023 and beyond).

What Income Qualifies?

To qualify for this subtraction, the income must be received as a result of:

1. Service in the active or reserve components of the U.S. Armed Forces.
2. Service in the Commissioned Corps of the National Oceanic and Atmospheric Administration (NOAA).
3. Service in the Commissioned Corps of the Public Health Service.
4. Benefits received through the Military Survivor Benefit Plan (SBP).

How to File and Claim the Subtraction

When preparing your Maryland tax return, you do not automatically receive this exemption. You must deduct it manually:

1. File Maryland Form 502 (resident tax return).
2. Report your full taxable military pension income under your Adjusted Gross Income (which carries over from your federal return).
3. Claim the military subtraction on Form 502SU (Subtraction Income Code u).
4. Enter the qualified amount ($12,500 if under 55, or $20,000 if 55 or older) to reduce your Maryland taxable income.

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Exemption for Military Survivor Benefits (SBP)

Under the same regulations, survivor benefits paid out to a beneficiary (such as a spouse or child) under the Military Survivor Benefit Plan (SBP) are also eligible for the state subtraction.

The beneficiary can claim the same age-based exemption caps ($12,500 if the beneficiary is under 55, or $20,000 if 55 or older). This subtraction is claimed separately by the survivor on their individual Maryland tax return.

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Common Mistakes & Best Practices

• Not Coordinating with the Standard Pension Exclusion: The military retirement subtraction is a specific exemption. If you have other non-military pension or retirement income, you may also qualify for the standard Maryland Pension Exclusion. Make sure you claim both if eligible, but you cannot "double dip" on the same dollars of retirement pay.
• Failing to Track Age Triggers: Ensure you adjust your state withholding and estimated tax vouchers once you turn 55, as your exemption limit increases from $12,500 to $20,000.
• Confusing Federal vs. State Rules: At the federal level, military retirement pay is fully taxable. The Maryland exemption applies only to your Maryland state and county tax returns.

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Frequently Asked Questions (FAQs)

Does Maryland tax active duty military pay?

If you are a Maryland resident on active duty, your active duty pay is generally taxable by Maryland. However, if you serve outside the state, you may qualify for an active duty military subtraction of up to $15,000 if your total military income is under a certain threshold. Non-resident active duty members stationed in Maryland are exempt from Maryland tax on their military pay under the federal Servicemembers Civil Relief Act (SCRA).

Is disability compensation from the VA taxed in Maryland?

No. VA disability benefits are 100% tax-free at both the federal and state levels. You do not need to report VA disability pay on your federal or Maryland state returns, and it does not count toward the $12,500/$20,000 military pension exemption caps.

Can National Guard and Reserve retirees claim the exemption?

Yes. Retirement pay earned from service in the National Guard or Reserves qualifies for the same age-based Maryland military retirement exemptions.