About 20 years ago or so, Maryland and several other States lost a case at the Supreme Court level dealing with retirees. What Maryland and these states wanted to do, was tax retirees on the retirement income that the State provided. However, the problem is that this “source taxing” is not legal according to our constitution.
Maryland reacted by enacting a provision that adds back to your income, the value they have placed into the retirement plan on your behalf. You will see that noted on your W-2. We have many teachers and Maryland State troopers as clients, and when preparing their return, there is an add back to their income.
The problem is this, if the person is in the Maryland retirement system, and they live in a state where we have agreements (such as Pennsylvania and Virginia), Maryland can not tax this money. So the sole responsibility of taxation is on those that reside in Maryland.
Consider this example, let’s say there are two teachers each making $50,000, one lives in Maryland and the other lives in Pennsylvania. Both have an add back on their W-2 of $2,500. Teacher 1, who is a Maryland resident, will pay tax on this $2,500 (about $180), whereas Teacher 2 who lives in Pennsylvania, will not pay any tax because Maryland and Pennsylvania do not tax each other’s residents.
Is that really fair? Another item to bring up with your Maryland representatives!