Does Maryland Tax Tips in 2026? Why Federal Savings Don't Reach Your MD Return
Maryland tipped workers got good news and complicated news from the OBBBA. The good news: the federal tips deduction shelters up to $25,000 of tip income from federal income tax. The complicated news: Maryland uses its own tax base, its own standard deduction formula, and has a long history of selectively decoupling from federal provisions. On top of that, every Maryland resident pays a mandatory county income tax that ranges from 2% to 3%. The result is that tips remain fully taxable at both the state and county level.
Maryland's conformity and below-the-line mechanics
Unlike states such as Massachusetts or Kentucky, Maryland did not formally decouple from the OBBBA. The Maryland Comptroller's September 5, 2025 analysis under Tax-General Article 10-110 found that the individual OBBBA deductions (tips, overtime, senior, vehicle loan interest) fall below the $5 million revenue-impact threshold that triggers automatic decoupling. Maryland technically conforms to these IRC provisions.
So why do Maryland workers see no state tax benefit? The answer is in the mechanics. The OBBBA tips deduction is a below-the-line deduction - it reduces federal taxable income (Form 1040 Line 15), not federal adjusted gross income (Form 1040 Line 11). Maryland computes income tax starting from federal AGI on Form 502, not federal taxable income. Because the tips deduction never touches federal AGI, it never enters the Maryland calculation.
Maryland also uses its own standard deduction formula rather than conforming to the federal standard deduction. The MD standard deduction is 15% of Maryland AGI, with a floor of $1,800 and a cap of $2,600 for single filers. This formula-based approach further separates the MD calculation from the federal one.
The county tax layer
What makes Maryland particularly costly for tipped workers is the mandatory county income tax. Every Maryland resident pays county tax on top of the state tax, and the county tax is computed on the same Maryland taxable income. County rates for 2026 range from 2% to 3%.
Most of Maryland's population lives in jurisdictions that impose a 3% county rate, including Montgomery County, Howard County, Prince George's County, Baltimore County, and Baltimore City. Frederick County has the highest rate at 3%.
Because the county tax is calculated on the same base as the state tax, the below-the-line mechanics mean tips are taxed at both the state and county level. There is no separate county-level deduction process. If a federal deduction does not reduce Maryland AGI, the county cannot benefit from it either.
Montgomery County worker with $10,000 in tips
Scenario: A single filer living in Montgomery County earns $45,000 in base wages and $10,000 in qualified tips during 2026. Total income: $55,000.
Federal return:
Gross income: $55,000
Standard deduction: -$16,100
Tips deduction (Schedule 1-A): -$10,000
Federal taxable income: $28,900
Federal tax savings from tips deduction: approximately $1,200
Maryland return:
Maryland AGI: $55,000
MD standard deduction (15% of AGI, capped): -$2,600
MD taxable income: $52,400
Tips deduction: $0 (not recognized by MD)
MD state tax (graduated): approximately $2,437
Montgomery County tax (3%): approximately $1,677
Total MD state + county tax: approximately $4,114
The worker saves $1,200 on the federal return. On the Maryland side, the full $10,000 in tips is included in both the state and county tax bases. At a combined marginal rate of 8.0% (state 5% + county 3%), the state-level cost of those tips is approximately $795. The federal deduction does not reduce Maryland AGI, so it provides zero Maryland relief.
Combined state + county rates
The table below shows Maryland's state income tax brackets for single filers in 2026. Remember that the county rate (shown separately) is added on top:
| MD taxable income | State rate |
|---|---|
| $0 - $1,000 | 2.0% |
| $1,000 - $2,000 | 3.0% |
| $2,000 - $3,000 | 4.0% |
| $3,000 - $100,000 | 4.8% |
| $100,000 - $125,000 | 5.0% |
| $125,000 - $150,000 | 5.3% |
| $150,000 - $250,000 | 5.5% |
| $250,000 - $500,000 | 5.8% |
For a Montgomery County resident in the 5% state bracket, the combined marginal rate is 8.0%. That means every additional dollar of tip income that remains taxable in Maryland costs roughly 8.0% in combined state and county tax, on top of whatever federal tax is owed (which may be zero if the tips deduction covers it).
This dual-layer system makes Maryland one of the states where the gap between federal and state tax treatment of tips is most visible. Despite formal OBBBA conformity, the below-the-line mechanics mean Maryland workers pay state and county tax on every dollar of tip income.
What MD workers should know
- Claim the federal deduction. The federal savings of $1,200 (in this example) are real and should not be left on the table. File Schedule 1-A with your federal return.
- Expect higher MD income than federal income. Your Maryland AGI will not reflect the federal tips deduction. Your MD Form 502 will show a higher income figure than your federal Form 1040.
- Check your county rate. Your county tax rate depends on where you live on December 31 of the tax year. Rates range from 2% to 3%. Use the Comptroller's county rate table to find your exact rate.
- Understand the mechanics. Maryland conforms to the OBBBA but the tips deduction is below-the-line and does not reduce federal AGI. Unless Congress changes the deduction to an above-the-line adjustment, or Maryland creates its own state-level tips deduction, state tax on tips will continue.
For a full comparison of state-by-state OBBBA conformity, see our state tips and overtime taxes map.