by Heath Harris
What You Need to Know About Retiring in Maryland
When planning for retirement, it’s important to factor in where you plan to spend your Golden Years. Do you hope to relocate to be closer to family or do you want to stay where you are, maintaining your lifestyle during your working years as much as possible?
This is an important question, because cost of living is different, taxes are different and state laws are different in different areas when it comes to finances and estate planning.
For many people, these retirement plans have them in Maryland, and it can be a good choice for retirees. The Chesapeake Bay provides excellent conditions for sailing and fishing, and the Maryland shore has some of the best Atlantic Ocean beaches in the country. In total, the state has 4,000 miles of shoreline, including rivers and creeks, which entices many retirees who are looking to spend their retirement time outdoors. In the western part of the state, skiing is abundant, and the middle of the state boasts a countryside of scenic rolling hills that are excellent for hiking.
There are also some financial benefits to retiring in Maryland. At Oliver Wealth Management, we help many people plan for a retirement in Maryland. Here are a few things to consider.
Taxes: A Mixed Picture
Taxes are important in retirement planning. In Maryland, there are some benefits for retirees (Social Security is not taxed) but there are also some potential drawbacks (it’s one of only two states to still have estate and inheritance taxes). Establishing an estate plan is important, so discussing your plans with a financial advisor who is based in the area can be a huge benefit. If you know what to expect ahead of time, you can better plan.
Ultimately, the question of whether Maryland is a good state for taxes depends on your specific situation, including factors such as your income stream in retirement, your real estate and your estate and its beneficiaries.
Let’s look closer at the components of Maryland taxes for retirees.
What’s Taxed and What’s Not
In Maryland, Social Security is fully exempt from state taxes. If you are assessed federal taxes on your Social Security income and live in Maryland, you can also subtract the federally taxed amount out of your taxable state income when you file a state return.
But income from IRAs and 401(k)s is fully taxable. So is income from private pensions. However, once you reach 65, the state allows a deduction on these income streams. Currently, the deduction is $29,900. Any Social Security benefits you’ve received is subtracted. In other words, if you receive $20,000 in Social Security benefits per year, the total deduction you’d be allowed is $9,900.
Public pension income is partly taxed.
If you work in retirement, your wages will be fully taxed. The marginal Maryland tax rate is 4.75 percent for wages.
Income tax brackets in Maryland depend on your income and filing status, and range from 2 percent to a top rate of 5.75 percent.
The average effective property tax rate in Maryland is 1.04 percent, roughly at the national average.
However, property itself tends to be expensive. On the positive side, there is a state homestead tax credit available that caps yearly increases in property value assessed at 10 percent, as long as you own and occupy the home. This applies to all state residents, not just retirees.
At 6 percent, the state sales tax is lower than the U.S. average by roughly 1 percent. Not only is that a positive for retirees, but no city or county sales taxes exist in Maryland. In other words, the most you will ever pay in sales tax is 6 percent.
Estate and Inheritance Taxes
In terms of estate planning, retirees should be aware that Maryland levies both estate and inheritance taxes.
Estates worth more than a certain amount are subject to estate taxes. In 2018, the amount was $4 million; in 2019, it rose to $5 million.
An estate tax must be paid before any amounts are disbursed to your beneficiaries. Maryland’s estate tax is graduated, depending on the amount of estate taxed. It ranges from 0 to a high of 16 percent.
Maryland also levies an inheritance tax, which your heirs must pay after they receive their bequests. Most immediate family members, such as spouses, children and other direct descendants, such as stepchildren, parents and siblings, are exempt from inheritance taxes. But if you leave part of your estate to more distant relatives or to people who are not relatives, they will be taxed at 10 percent.
Although this tax does not apply to everyone, the burden very much depends on the size of your estate and who your beneficiaries are. If you plan bequests to friends and relatives outside your immediate family, the taxes may feel punitive, especially in contrast to other states, because the vast majority of states do not levy such a tax.
Making a Choice
While Maryland has excellent qualities for retirees, such as leisure pursuits and great healthcare options, it can also have some economic drawbacks, like housing costs and estate and inheritance taxes. Ultimately, whether the state is a good retirement choice or not depends highly on your individual situation.
When making a decision about where to live in retirement, first, ask yourself what you plan to do.
In addition to many outdoor activities, Maryland also has a wealth of culture and arts, ranging from the Baltimore Art Museum and Symphony Orchestra to the nearby cultural attractions of Washington, DC. The state also has a rich history. It was one of the 13 original colonies and major Civil War battles like Antietam were fought in Maryland.
The climate is also reliably mild – in fact, many people think it’s “just right” year-round, with a low of 28 degrees in January and a high of 65 degrees in July, on average. Unlike retirees to the Sun Belt, senior citizens in Maryland have the benefits of seasons, but don’t suffer from extreme heat in the summer.
Maryland also has some of the finest healthcare and medical treatment in the country, ranging from the cutting-edge research at Johns Hopkins Hospital to the full-service care of the University of Maryland health system – 10 Maryland hospitals made the U.S. News and World Report list of best hospitals nationwide, including Johns Hopkins Hospital, University of Maryland Medical Center, Mercy Medical Center and Sinai Hospital of Baltimore.
The second question you should ask yourself is how much money you will need to live this life in retirement.
It can be extremely beneficial to discuss your specific situation with a financial advisor and determine whether Maryland is your best retirement choice – and how to optimize your financial life if you live there or are headed there.