What Does Maryland’s New Budget Reconciliation and Financing Act Mean for You?

Just before the close of the 2025 legislative session, the Maryland General Assembly passed a $67.9 billion budget, as well as the Budget Reconciliation and Financing Act (BRFA) that addresses a projected $3.3 billion budget deficit. This legislation introduces several strategies to balance the budget, the most significant of which is changes to the state’s tax code, effective from the 2025 tax year onward. The reforms aim to simplify the tax system, adjust tax burdens, and generate additional revenue. For Maryland taxpayers, understanding these developments and preparing accordingly is crucial. 

Understanding the Budget Deficit

The state’s budget deficit stems from several factors, including underperforming sales tax and lottery revenues, as well as economic disruptions from the pandemic. Additionally, Maryland’s heavy reliance on federal employment and contracts has created vulnerabilities, especially with potential federal budget cuts on the horizon. 

In response to the fiscal challenges, Governor Wes Moore and legislative leaders have agreed on a budget framework that includes both spending cuts and tax reforms. Here are some of those key changes: 

Personal Income Taxes

• Simplified Tax Brackets: New brackets for higher earners include a 6.25% rate for income over $500,000 and 6.5% for income exceeding $1 million. 

• Capital Gain Surcharge: A 2% surcharge will be imposed on capital gains for taxpayers with federal adjusted gross income (AGI) over $350,000. 

• Phase-Out of Itemized Deductions: There will be a phase-out factor of 7.5% on itemized deductions for taxpayers with a federal AGI over $200,000. For example, a taxpayer with a federal AGI of $500,000 with $50,000 of itemized deductions has the following phase-out:  

• The AGI is $300,000 over the 200K threshold. The excess AGI ($300,000) multiplied by 7.5% is the amount of itemized deductions phased out ($22,500). The total itemized deductions allowed would be $27,500 ($50,000 less $22,500 phase-out).  

• Increased Limits for Local Tax Rates: The maximum local income tax rate that may be imposed will increase from 3.2% to 3.3%. 

Sales Tax on Data and IT Services

A 3% sales tax on information technology services is proposed to modernize revenue streams in line with the digital economy. The Comptroller is expected to issue more guidance on this new tax in June 2025. 

Pass-Through Entity (PTE) Tax Amendment

Effective for tax years starting in 2026, the amendment provides that if a PTE elects to pay tax on behalf of all its members, a resident member’s tax liability will be based on the PTE’s total income (not apportioned), and a non-resident member’s tax liability will be based on the PTE’s Maryland apportioned income. This approach mirrors Virginia’s PTE tax policy.  

Technical corrections are needed, as there are no opt-outs or special elections for S-Corporations to avoid second-class stock issues due to special allocations of the Maryland PTE liability. Such corrections are expected in the next legislative session.  

Fees and Excise Tax Increases

In addition, the BRFA also includes a list of tax increases to the following: 

Vehicle Excise Tax
Before: 6% | Now: 6.5%

Short-Term Rental Vehicle Tax
Before: Exempt | Now: 3.5%

Cannabis Sales Tax
Before: 9% | Now: 12%

Sports Betting Tax
Before: 15% | Now: 20%

New Tire Fee
Before: $0 | Now: $5 per tire

Vehicle Emissions Inspection Fee
Before: $14 | Now: $30

Vending Machine Sales Tax
Before: 6% | Now: 6%

Preparing for the Changes

As with all new legislation, the practical application of these new provisions has yet to be developed. The Comptroller‘s forthcoming guidance will come ahead of the implementation of the new sales tax on data and IT services. As more information and guidance is made available, here are a few things Maryland taxpayers can do to prepare for the changes: 

• Stay informed. Keep abreast of legislative developments to understand how new laws may affect your financial situation. Utilize resources like the Maryland Tax Toolkit to stay updated on tax credits, filing deadlines, and other relevant information. 

• Evaluate timing of recognizing capital gains. With the surcharge of 2% on capital gains for taxpayers with a federal AGI over $350,000 planning may be available to minimize the impact of this new provision. 

• Review your tax withholding and estimated payments. With changes to tax brackets and the elimination of itemized deductions, it’s essential to reassess your withholding or estimated tax payments to avoid surprises when filing. 

• Maximize retirement contributions. Contributing to retirement accounts like 401(k)s or IRAs can reduce taxable income, which is particularly beneficial given the new tax structure. 

• Evaluate charitable giving strategies. Since itemized deductions are eliminated, consider “bunching” charitable donations into a single year to exceed the standard deduction threshold, or explore donor-advised funds to maintain tax efficiency in your philanthropic efforts. 

Most importantly, consult your CPA and other financial advisors. Given the complexity of the new tax laws, seeking advice from a tax professional can help you understand the implications for your specific situation and identify strategies to minimize your tax liability. 

By proactively understanding and preparing for these budgetary changes, Maryland taxpayers can better navigate the fiscal landscape and mitigate potential negative impacts on their finances.