Maryland and the federal government do not agree on what counts as taxable income, what deductions are allowed, or how businesses are taxed. These differences — called conformity gaps — cost Maryland taxpayers real money when they go unnoticed. This is the article that ties the entire Maryland tax series together.
Maryland Tax Guide Series — All Articles
Most taxpayers think of their tax return as one thing — when in reality it is two separate calculations happening simultaneously. Your federal return is governed by the Internal Revenue Code. Your Maryland return starts with your federal adjusted gross income but then applies Maryland's own additions, subtractions, credits, and deductions that diverge significantly from federal law.
Maryland is a so-called "rolling conformity" state — it generally adopts federal tax law changes automatically unless the Maryland legislature specifically decouples from them. But Maryland has decoupled from a significant number of federal provisions over the years, and some of the most valuable federal tax benefits simply do not exist on your Maryland return. Missing these differences means either overpaying Maryland tax or missing planning opportunities that a Maryland-specific CPA would catch. See our Maryland Tax Guide for a full overview of Maryland's tax system.
The 20% Qualified Business Income (QBI) deduction under Section 199A — made permanent by the One Big Beautiful Bill Act — is one of the most valuable federal tax benefits for pass-through business owners. A business owner with $200,000 in qualified business income gets a $40,000 federal deduction, reducing federal taxable income by 20%.
Maryland does not conform to Section 199A. The QBI deduction does not exist on your Maryland return. The full $200,000 is taxable in Maryland. At Frederick County's combined 8.75% rate, that's $17,500 in Maryland tax on income that is entirely deducted at the federal level. This is one of the most significant Maryland-federal divergences for small business owners.
The QBI deduction reduces your federal tax but not your Maryland tax. This makes Maryland-specific tax reduction strategies — like the PTE election — more valuable than they might appear at first glance. See our article on the Maryland PTE tax election.
The One Big Beautiful Bill Act permanently restored 100% federal bonus depreciation for qualified property placed in service after January 19, 2025. This allows businesses to deduct the full cost of equipment, vehicles, and other qualifying assets in the year purchased rather than depreciating them over years.
Maryland's conformity to bonus depreciation is partial and complicated. Maryland historically required a depreciation addback — requiring businesses to add back a portion of the federal bonus depreciation taken in the first year, then allowing them to deduct it over subsequent years on the Maryland return. This creates a timing difference: you get a larger deduction faster on your federal return than on your Maryland return.
The practical effect is that a Frederick County contractor who buys $200,000 in equipment and takes 100% bonus depreciation on the federal return may only be able to deduct a fraction of that in year one on the Maryland return. We track these timing differences for every business client to ensure accurate Maryland filings.
The One Big Beautiful Bill Act created a federal deduction for qualified tip income effective 2025 through 2028. Maryland has not conformed to this provision — tip income that is deductible at the federal level remains fully taxable on your Maryland return for 2025 and 2026. See our full OBBBA guide for details.
Similarly, the federal overtime pay deduction created by the One Big Beautiful Bill Act does not have a Maryland equivalent. Overtime premium pay that is excluded from federal taxable income is still fully taxable on your Maryland return. Maryland workers who benefit significantly from the federal overtime deduction should be aware that their Maryland tax bill will not decrease proportionally.
The federal estate tax exemption was raised to $15 million per person beginning in 2026 under the One Big Beautiful Bill Act. Maryland has its own separate estate tax with a $5 million exemption — with no portability between spouses. This creates a significant gap:
Maryland is one of only a handful of states with its own estate tax, and its exemption is among the lowest in the country. For Frederick County families with significant assets — farm property, investment real estate, business interests — Maryland estate planning is a distinct and critical need separate from federal estate planning. Our estate and trust tax team handles Maryland estate planning specifically.
At the federal level, up to 85% of Social Security benefits may be taxable depending on your combined income. Maryland provides a more generous treatment — Maryland residents age 65 and older can exclude up to $34,500 of federally taxable retirement income from Maryland taxable income, which includes Social Security benefits, pension income, and IRA distributions.
This means many Maryland retirees pay significantly less Maryland income tax on retirement income than their federal return would suggest. The exemption amount is indexed for inflation and applies per person — a married couple filing jointly can each claim the exclusion separately.
Maryland retirees should carefully plan the timing and source of retirement income withdrawals to maximize the Maryland pension exclusion. Roth conversions, IRA distributions, and pension income all interact with this exclusion in ways that affect your Maryland tax bill — often differently than the federal impact.
At the federal level, most taxpayers take the standard deduction — $15,750 for single filers and $31,500 for married filing jointly in 2025. Maryland has its own standard deduction, but it is dramatically smaller — $2,400 for single filers and $4,850 for married filing jointly in 2026, with income-based limitations.
This means Maryland taxpayers who take the federal standard deduction are still essentially itemizing on their Maryland return — or accepting a very small Maryland standard deduction. The practical effect is that more Maryland taxpayers benefit from itemizing on their state return than on their federal return, and the decisions are made independently.
Federal tax law provides preferential rates for long-term capital gains — 0%, 15%, or 20% depending on income level. Maryland does not have preferential capital gains rates. All capital gains — short-term and long-term — are taxed as ordinary income in Maryland at up to 5.75% state plus the applicable local rate.
For a Frederick County resident in the top Maryland bracket, long-term capital gains that are taxed at 15% or 20% federally are taxed at 8.75% combined in Maryland. On a $500,000 capital gain, that's $43,750 in Maryland tax — entirely separate from federal. Capital gain timing strategies that work well federally must be evaluated separately for Maryland.
Here is a quick reference for how Maryland treats the most significant federal tax provisions:
| Federal Provision | Federal Treatment | Maryland Conforms? |
|---|---|---|
| QBI Deduction (Section 199A) | 20% deduction on qualified business income | No |
| 100% Bonus Depreciation | Full first-year deduction for qualifying property | Partial |
| Section 179 Expensing ($2.5M limit) | Immediate expensing up to $2.5M | Partial |
| No Tax on Tips (OBBBA) | Qualified tip income deductible 2025–2028 | No |
| No Tax on Overtime (OBBBA) | Overtime premium deductible 2025–2028 | No |
| Senior Bonus Deduction $6,000 (OBBBA) | $6,000 deduction for taxpayers 65+ | Yes |
| SALT Cap $40,000 (OBBBA) | $40,000 SALT deduction cap 2025–2029 | N/A — Maryland has no SALT cap |
| Long-Term Capital Gains Rates | 0%, 15%, 20% preferential rates | No — taxed as ordinary income |
| Social Security — up to 85% taxable | Federal inclusion based on combined income | Partial — MD pension exclusion applies |
| Estate Tax Exemption $15M (OBBBA) | $15M per person, indexed for inflation | No — MD exemption is $5M |
| Standard Deduction ($31,500 MFJ) | $31,500 for married filing jointly (2025) | No — MD standard deduction is $4,850 MFJ |
| Child Tax Credit $2,200 | $2,200 per child under 17 | Partial — MD has separate lower-income CTC |
| Auto Loan Interest Deduction (OBBBA) | Up to $10,000 for new US-assembled vehicles | Not yet confirmed |
The bottom line is that your Maryland tax return is not simply a copy of your federal return with a different rate applied. It is a separate calculation with its own additions, subtractions, credits, and limitations — many of which diverge significantly from federal law.
For Frederick County business owners in particular, the non-conformity to the QBI deduction and bonus depreciation creates a Maryland tax burden that is higher relative to federal than most taxpayers realize. The PTE election, careful depreciation planning, and retirement income timing strategies are all tools that reduce Maryland tax specifically — and they only work if your CPA is thinking about Maryland separately from federal.
This is exactly where national tax software and out-of-state preparers fall short. They optimize for federal. We optimize for both.
Every client engagement at Mercer Flanagan includes a Maryland-specific tax review alongside the federal analysis. We track conformity changes, monitor Maryland legislative developments, and flag every situation where Maryland and federal treatment diverge. If you are currently working with a preparer who does not routinely discuss Maryland-specific planning, there is a good chance you are leaving money on the table. Contact us to find out.
Not necessarily. Federal and Maryland refunds are calculated completely independently. It is entirely possible to receive a large federal refund while owing Maryland tax — or vice versa. Your withholding and estimated payments are tracked separately by the IRS and the Maryland Comptroller, and the calculations that determine your refund or balance due are based on different income figures and deductions.
Yes, but with important exclusions. Maryland residents age 65 and older can exclude up to $34,500 of qualifying retirement income — including Social Security, pensions, and IRA distributions — from Maryland taxable income. Below age 65, the exclusion is smaller. Military retirement income is fully exempt from Maryland tax regardless of age. Federal government retirement income and certain other pension types also receive favorable Maryland treatment.
Maryland does not have a separate AMT system like the federal government. However, Maryland's limited standard deduction and non-conformity to several federal deductions means that some taxpayers who escape the federal AMT still face relatively high Maryland effective tax rates due to these conformity gaps.
Ask them specifically about the QBI deduction on your Maryland return, whether they analyzed the PTE election for your business, and how they handled bonus depreciation on your Maryland return if you made equipment purchases. If they struggle to answer these questions or were not aware of the Maryland-federal differences, it may be worth a second opinion. We offer free consultations for exactly this purpose — contact us here.
Roy Cogliandolo, CPA
Mercer Flanagan · Frederick, MD · Updated June 2026
Most national software and out-of-state preparers focus on federal. We focus on both. If you haven't had a Maryland-specific tax review, there's a good chance you're overpaying the state.
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