Delegate Krebs Introduces Bill to Help Retirees in Maryland
Maryland has an unfair disparity in our law, regarding the taxation of retirement income. Delegate Susan Krebs of Carroll County (District 5) has introduced House Bill 195 - Fairness in Taxation for Retirees Act to address this problem. HB 195 will broaden the definition of income to include any and all sources of retirement income as it applies to Maryland’s “pension exclusion”.
- Closes a hole in our tax code that creates two classes of retirees—those who work for employers who offer “employee retirement plans” and those who must create and fund their own savings and retirement plans. HB 195 corrects this inequity by allowing retirees to qualify for the full Pension Exclusion if they receive income from any of the following retirement vehicles: Traditional IRAs, IRA rollovers, Roth IRAs, Simplified Employee Pensions (SEPs), Keogh Plans, SIMPLE Retirement Plans under Sec 408 of the IRC., or ineligible deferred compensation plans under Sec. 457 (f).
- Updates our tax code to reflect the current trend away from traditional retirement plans and toward alternative retirement vehicles and self-funded retirement plans.
- Serves as an economic development tool by attracting and retaining retired people in Maryland.
- Brings us in line with our neighboring states. Pennsylvania does not tax post-retirement distributions from employer plans and all IRA income for those over the age of 59 ½. Delaware allows for a $12,500 subtraction for pensions and investment income of those over 59 and does not tax Social Security. Maryland has a narrower exclusion and higher overall tax rate than our neighboring states, which discourages retirees from staying in Maryland.
Maryland law allows for a “pension exclusion” (in the form of a subtraction modification) for individuals who are at least 65 years old or who are totally disabled. The maximum exclusion allowed is the maximum annual Social Security benefit payable (currently $29,400 for 2016) and is reduced by the amount of Social Security benefits received.
Most states that levy a personal income tax allow people who receive retirement income to exclude partof it from their taxable income, but in Maryland, not all retirees are treated the same.
Maryland’s outdated tax code is inconsistent and discriminates against workers who do not have “traditional employee retirement plans.” Currently, only retirees in a traditional employee retirement system are eligible for a full Pension Exclusion, which allows them to subtract a portion of their “pension” income for income tax purposes. Those retirees who only have IRA, Roth IRA, SEP, or Keogh plans are not able to exclude any of their “pensions” from taxation. According to the Office of the Comptroller, the average Maryland recipient of Social Security deducted $15,000 per tax return in 2014, with the maximum deduction currently set at $29,400 for 2016. Under the current law, the same individual could deduct the difference.
More and more businesses are doing away with “employer sponsored retirement plans”. As a result, Maryland has two classes of workers—those with traditional employee retirement plans and those without. Only 5 percent of private workers have traditional defined benefit pension plans, compared with more than 80 percent of government employees. Why should our citizens, who must fund their own retirement plans, be barred from taking the same Pension Exclusion that those with traditional employer sponsored retirement plans?
The answer is that they shouldn't. We thank Delegate Krebs for fighting for our senior citizens!