The Maryland High Earner's Tax Playbook for 2026
This guide breaks down what you need to know about your 2026 tax planning landscape. You'll walk through federal taxes, Maryland state tax burden, and specific optimization levers for federal employees, small business owners, and high income professionals. Topics include the federal SALT cap expansion through 2029, Maryland's new tax brackets and capital gains surcharge, and how to coordinate these changes across retirement planning, equity compensation, and business structure.
The Federal Tax Landscape in 2026
Congress passed major federal tax legislation in 2025, the One Big Beautiful Bill Act (OBBBA), which extended key tax provisions that affect your 2026 planning. Understanding what changed and what's still expiring is critical.
What Was Extended
The major income tax brackets, standard deduction, and top marginal federal income tax rate of 37% remain in effect for 2026. The qualified business income (QBI) deduction for pass-through entities was also made permanent. For a married couple in Bethesda earning $750,000, this avoids what would have been a jump to 39.6%.
What Changed: The SALT Cap Expansion
The most significant change for Maryland residents is the SALT (state and local tax) deduction cap. Rather than remaining at $10,000, the cap has been expanded to $40,000 for 2025-2029, then reverts to $10,000 in 2030. This is substantial relief.
For a household paying $25,000 in Maryland state income tax and $15,000 in property tax, the ability to deduct the full $40,000 rather than being capped at $10,000 is genuinely meaningful. The annual tax savings for Maryland residents paying substantial state and local taxes can easily exceed $5,000.
However, there's a critical caveat: the expanded cap phases out for high earners. The full $40,000 cap applies only to those with modified adjusted gross income below $500,000. For income between $500,000 and $600,000, the cap is reduced by 30% of income over the $500,000 threshold. At $600,000 MAGI and above, the cap returns to $10,000.
Additionally, both the cap and the phase-out threshold increase by 1% annually through 2029.
Maryland's Tax Burden: What High Earners Face
The new income tax and surcharge provisions apply starting in 2025. If you're a high-earning professional in Maryland, you're already subject to these new rates. Understanding the new structure is critical for your 2026 planning.
The New Tax Bracket Structure
Before 2025, Maryland's top state income tax rate was 5.75%, applied to taxable income above $250,000 for single filers and $300,000 for married couples, with lower rates applying to income below those thresholds. That simplicity is gone.
Effective for 2025 and beyond, Maryland created two new tax brackets for high earners:
A 6.25% bracket applies to Maryland taxable income between $500,000 and $1,000,000 for single filers ($600,000 to $1,200,000 for married couples filing jointly). For a married couple in Bethesda with $750,000 in income, the portion above $600,000 is now taxed at 6.25% instead of 5.75%.
A 6.5% bracket applies to Maryland taxable income over $1,000,000 for single filers ($1,200,000 for married couples).
These increases apply for tax years 2025 and beyond. If you earned income in 2025, you're already subject to these rates.
The Capital Gains Surcharge (New)
Maryland also implemented a 2% surcharge on net capital gains for taxpayers whose federal adjusted gross income exceeds $350,000.
This matters significantly for several groups:
If you sell your primary residence for $1,500,000 or less, any gain is exempt from the surtax. But concentrated positions, RSU gains, business sale proceeds, and investment portfolio gains are all subject to this surcharge.
Example: A married couple in Maryland with $400,000 in federal AGI, including $50,000 of investment gains, owes an additional $1,000 to Maryland (2% × $50,000).
For equity compensation holders (RSUs, stock options), this is especially relevant. RSU vesting creates ordinary income that increases your AGI, which in turn triggers the capital gains surcharge on your investment portfolio gains.
The County Piggyback Tax (Increased)
Maryland's county-level income tax rates have a new maximum of 3.3% (up from 3.2%). Montgomery County remains at 3.2% for now.
Standard and Itemized Deductions (Changed)
Maryland increased standard deductions and implemented a new limitation on itemized deductions:
The standard deduction increased from $2,700 to $3,350 for single taxpayers and from $4,500 to $6,700 for married couples filing jointly. These amounts are now indexed for inflation going forward.
However, itemized deductions are reduced by 7.5% of federal AGI in excess of $200,000 (joint) or $100,000 (single). This phase-out significantly reduces the value of itemized deductions for high earners.
Example: A married couple in Takoma Park with $400,000 in federal AGI claiming $50,000 in itemized deductions (SALT, mortgage interest, charitable giving) must reduce those deductions by $15,000 (7.5% × $200,000). Their allowable itemized deduction becomes $35,000.
Strategic Planning for 2026 and Beyond
Here are the key strategies for Maryland high earners navigating this tax burden.
Capital Gains Surcharge Strategy
The new 2% Maryland capital gains surcharge creates a planning complexity that didn't exist before. Once your federal AGI exceeds $350,000, every dollar of capital gains triggers an additional 2% state tax.
This affects several high-earner situations:
For equity compensation holders: If you're expecting RSU vesting or option exercises this year that will push your AGI over $350,000, pay attention to when you sell investments. That's because RSU vesting increases your AGI, which then triggers the 2% capital gains surcharge on any investment gains you realize that same year. This creates a timing opportunity. In years when you have significant RSU vesting, harvesting investment losses (selling losers to offset winners) can reduce your overall tax bill. Those losses lower the amount of capital gains subject to the 2% surcharge.
For concentrated position holders: If you're holding a concentrated position and considering diversification, the capital gains surcharge adds another 2% to the cost. This might make charitable giving of appreciated stock (which avoids tax entirely) more attractive than selling and diversifying through purchases.
For business owners: If you're anticipating a business sale or significant capital gain year, planning for the surcharge is critical. Years with lower ordinary income might be strategic years to trigger capital gains (to minimize the surcharge impact).
For investment management: The surcharge makes tax-loss harvesting and tax-efficient security selection even more critical in taxable accounts. Once your AGI exceeds $350,000, every dollar of realized capital gains triggers an additional 2% Maryland tax on top of federal rates. This underscores why holding extremely tax-efficient investments in taxable accounts (low-turnover index funds, ETFs with minimal distributions) is essential, and why systematic tax-loss harvesting can offset both the surcharge impact and provide real tax savings.
Roth Conversions: Context-Dependent Strategy
For Maryland residents, Roth conversions are a nuanced decision that depends heavily on your specific circumstances and retirement location.
If you're staying in Maryland through retirement, Roth conversions make sense in specific situations: years with unusually low income (job change, sabbatical, business dip), or when you have significant deductions that drop your tax bracket. You can also do conversions for estate planning purposes: Roth IRAs have no required minimum distributions, allowing wealth to pass tax-free to heirs.
If you're planning to retire in a different location, the decision requires careful analysis. Roth conversions are subject to Maryland state income tax (up to 6.5% at higher incomes) plus your county's local tax (roughly 2.25% to 3.3%), so the combined state-and-local cost of converting often falls around 8% to 10% for high earners. If you expect your retirement tax bracket to be lower than your current earning years (due to lower overall income), deferring conversions until after retirement may let you convert at a lower effective tax rate. This is worth analyzing based on your specific retirement income projections.
Retirement Account Optimization
Federal employees in the Washington, DC area have a unique advantage with the Thrift Savings Plan. The TSP's low expense ratios and tax-deferred growth remain excellent wealth-building tools. Understanding TSP optimization is crucial. For 2026, the 401(k) employee contribution limit is $24,500 for those under 50. Those aged 50-59 can contribute an additional $8,000 catch-up. Those aged 60-63 can contribute an enhanced catch-up of $11,250. Those aged 64 and up can contribute an additional $8,000 catch-up.
For business owners, options expand considerably. A Solo 401(k) can shelter significantly more income. A cash balance pension plan, layered on top, can shelter even more for those with consistent high earnings. Learn more about retirement planning strategies.
The choice between traditional (pre-tax) and Roth contributions depends on your specific circumstances: your current tax bracket and expected retirement income. If you expect to be in a lower bracket in retirement, traditional contributions likely make sense. If you expect your marginal tax rate to be higher in the future, Roth becomes more attractive.
Charitable Giving Strategies (Now More Valuable)
The expanded SALT cap ($40,000 through 2029) has fundamentally changed charitable giving math for Maryland residents. Under the old $10,000 cap, many high earners couldn't itemize because even SALT ($10,000) plus mortgage interest plus charitable giving didn't exceed the standard deduction. So they simply took the standard deduction.
Now, with the $40,000 SALT cap in place, you're likely itemizing automatically. This makes every dollar of charitable giving genuinely valuable.
For someone who couldn't itemize before but can now: giving $10,000 to charity provides meaningful tax savings (federal and state combined), plus you're no longer "wasting" the SALT deduction. Donor-advised funds are especially useful. You contribute a lump sum, get the tax deduction, and distribute grants to charities over time.
For someone with significant charitable intent: consider timing gifts strategically. The $40,000 SALT cap remains in place through 2029, but reverts to $10,000 in 2030. Bunching charitable contributions into the 2025-2029 window maximizes their value before the cap shrinks.
Equity Compensation Planning
For business owners and professionals with equity compensation or deferred compensation, the tax rate environment matters enormously. Incentive stock options (ISOs) held for the required period generate long-term capital gains rather than ordinary income. If ordinary rates rise more than capital gains rates, the value of ISO treatment increases.
For concentrated position holders and equity compensation recipients in the DC area, the capital gains surcharge fundamentally changes your decision-making around timing and asset diversification. Non-qualified stock options (NQSOs) create ordinary income at exercise. If you have control over exercise timing, modeling the impact of different rate scenarios is essential. The alternative minimum tax (AMT) also becomes more relevant if ordinary rates rise, since the AMT rate structure changes less dramatically. Professionals with significant equity compensation should consider working with a planner who specializes in equity compensation strategies to navigate these decisions.
Asset Location Across Your Portfolio
Where you hold different investments matters as much as what you hold. For Maryland residents, this is especially critical. Bond funds that generate ordinary income are better held in IRAs or 401(k) plans where that income isn't taxed annually. Index funds with low turnover and qualified dividends may be more appropriate for taxable accounts. Learn more about investment management strategies.
Maryland taxes capital gains as ordinary income, which makes tax-efficient investment positioning especially important for residents.
What Should You Do Now?
Maryland residents face significant tax burden across multiple levels. Add in the decisions around retirement accounts, equity compensation, charitable giving, and business structure. Coordinating all these pieces to optimize your outcome requires integrated financial planning.
Model Multiple Scenarios
Consider the timing of major decisions. When you realize capital gains, how you structure retirement contributions, whether you accelerate business income. These timing decisions create different tax outcomes. Modeling a few scenarios helps you understand which decisions matter most to your situation.
Review Your Withholding and Estimated Taxes
If rates change mid-year, you don't want to face underpayment penalties or strain your cash flow planning. Building in a cushion for 2026 estimated taxes is prudent.
Document Your Flexibility
Identify which levers you can actually pull. Can you defer a bonus? Accelerate option exercises? Time a business sale? Control partnership distributions? Knowing your options before year-end crunch time gives you an advantage.
Coordinate Across Your Financial Life
Tax planning doesn't exist in isolation. The decision to accelerate income affects your cash flow. Roth conversions affect your estate plan. Retirement contributions affect your investment allocation. Integrated planning produces better outcomes than optimizing any single variable.
The Bottom Line for Maryland High Earners
Living and working in the Washington, DC area comes with undeniable professional advantages. The tax burden is the trade-off.
Maryland's tax environment is genuinely complex. Federal brackets, state brackets, county tax, capital gains surcharge, SALT cap phases, itemized deduction limits, retirement plan options, equity compensation timing, business structure choices. The number of moving pieces means the difference between high earners who optimize and those who don't often comes down to one thing: whether they treat tax planning as an afterthought or work with someone who specializes in it.
If you're a Maryland professional or business owner seeking fee-only fiduciary financial planning with a tax-focused approach, working with an advisor who understands both the federal tax code and the specific challenges facing Washington, DC area residents can make a meaningful difference. The complexity of coordinating federal, state, and county taxes with retirement planning, equity compensation, and wealth-building goals is exactly where integrated financial planning pays for itself.
Ready to discuss how these changes affect your specific situation? If you're a Maryland resident seeking fee-only fiduciary tax-efficient financial planning tailored to your situation, schedule a free 30-minute intro call or contact me to review your 2026 tax strategy.