This year, Maryland passed the most significant tax law changes in recent memory. Prompted by the $3+ billion deficit it faced, the changes affect business income tax, individual income tax, sales tax, resident fees, and more.
We’ve provided highlights for small businesses and their owners below, and you may also want to reach out to our Tax Design Team to discuss how these will impact you and possibilities for tax savings.
New 3% Maryland “Sales Tax” on Data & IT Services
One of the most significant changes that occurred in the Budget Reconciliation and Financing Act (BRFA) was a new 3% sales tax on data and IT services/ software.
Even if you’re not in these industries, this change almost certainly impacts you since effectively all small businesses use data and IT services/ software and those costs just went up 3%. (You’re likely already seeing this difference on your invoices for web/email hosting, cloud software subscriptions, and from your IT service providers.)
And if you are in the data or IT space, there’s a high probability this affects you even more directly. Specifically, NAICS industry codes 518, 519, 5415, and 5132 are affected and you can find additional details in the Comptroller’s Technical Bulletin 56.
New “State Income Tax” Brackets up to Additional 0.75%
The biggest change to Maryland income tax law is the addition of two new higher state tax brackets. Previously, the highest state tax bracket was 5.75%, but now there’s a 6.25% and a 6.5% bracket as well, applied as follows:
- 5.75% for taxable income $250k – $500k for Single/ MFS; and $300k to $600k for MFJ/ HOH
- 6.25% for taxable income $500k to $1m for Single/ MFS; and $600k to $1.2m for MFJ/ HOH
- 6.5% for taxable income $1m+ for Single/ MFS; and $1.2m+ for MFJ/ HOH
By way of example, assuming a business owner had $1m of taxable income and was married, this leads to a $2,000 difference to their Maryland state tax.
Raising the “Local Income Tax” Ceiling by 0.1%
Remember that Maryland’s income tax structure differs from many other states in that it contains two pieces: (a) a state income tax piece (described above), and (b) a local income tax piece (determined by your County of residence). Adding those two amounts together gets you the total you see on your annual Maryland income tax return.
Counties hold the legislative authority to set their own “local income tax” rate, but the State does define the max these rates can be. In the past, that’s been 3.2% — now that’s 3.3%
Thus far, five Counties have changed their rates for 2025: Dorchester at 3.3%, St. Mary’s at 3.2%, Calvert at 3.2%, Anne Arundel at 2.94%, and Cecil at 2.74%
And for 2026, two counties have already set new rates as well: Allegany at 3.2% and Kent at 3.3%.
Maryland “Pass-Through Entity Tax” Increases 0.75%
One of the second-order impacts from the changes to the state and local tax rates above, is a linked change to the ‘pass through entity tax’ (PTET) rate as well.
You may recall, PTET is an optional election where a business can remit taxes for state purposes from the business itself (instead of ‘passing through’ the income to be taxed on the business owner’s personal return). This tax strategy emerged as a result of the state tax deduction limit imposed on an individual’s federal return, and depending on the business’ income level and the business owner’s personal tax return, can be a way to ensure state taxes are fully deduced.
But for Maryland, the tax assessed on pass-through businesses is the combined amount of the highest state tax bracket and lowest local tax bracket. That combination now moves up 0.75%, and so the PTET is now 0.75% higher as well (totaling 8.75%).
There is some opportunity for tax planning on whether to elect PTET treatment for 2026 since the new federal tax law change raised the personal deduction from $10k to $40k (through 2028). So, depending on your situation, it may be worth evaluating before you make any 2026 estimated tax payments (since those payments lock-in the tax treatment for the 2026 tax year).
New “Personal Itemized Deductions” Phase-Out
Starting in 2025, your ability to itemize on your Maryland return may be limited if your federal AGI exceeds $200k ($100k for MFS).
To the extent your federal AGI exceeds the applicable of those two thresholds, 7.5% of the excess will be used to reduce the personal itemized deduction you can claim on your Maryland return.
The one possible silver lining is that if you aren’t itemizing, the Maryland standard deduction increased around $650 to $1,250, depending on income level.
New 2% Capital Gains Surtax
Historically, capitals gains in Maryland were lumped in and taxed at the same rate as other income sources. But starting in 2025, if your federal AGI exceeds $350k, those capital gains will have an additional 2% tax added to your state return.
There are some exceptions, such as for Section 179 recapture, land subject to preservation easements, and other edge cases, but by-and-large, it’s applicable to most of your normal capital gains scenarios.
Update your Cash Flow and Tax Plan with our Tax Design Team
Maryland’s huge 2025 tax law change included many other provisions as well, covering everything from car registration fees, tire fees, emissions fees, and more. But the above are key ones that impact small businesses and their owners.
For members of the Elements Circle, don’t hesitate to reach out to our Tax Design Team to talk through how they impact your particular situation, to perform a Tax Projection, and consider what opportunities may exist for tax savings.
