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Tax Year 2026Updated July 13, 2026

Does Maryland Tax Overtime in 2026?

Yes - Maryland taxes overtime pay in 2026, despite technically conforming to the OBBBA. Maryland's auto-decoupling threshold does not trigger for the OBBBA overtime deduction (per the Comptroller's September 5, 2025 analysis), so Maryland technically conforms. However, the OBBBA overtime deduction (IRC §225) is a below-the-line deduction - it reduces federal taxable income, not federal AGI. Maryland Form 502 starts from federal AGI, so the deduction never enters Maryland's calculation. Practical effect: no Maryland tax benefit for overtime workers. All overtime premium pay remains subject to Maryland's graduated income tax rates (up to 6.5%) plus mandatory county income taxes of 2.25%–3.30%.

How Maryland's Overtime Tax Treatment Works

Maryland's treatment of the OBBBA overtime deduction is nuanced and turns on a structural feature of the deduction itself - not on decoupling legislation.

Technical conformity, no practical benefit: Maryland's tax code includes an auto-decoupling mechanism that triggers when a federal provision would cost Maryland more than $5 million in revenue. The Comptroller's September 5, 2025 analysis determined that the OBBBA individual deductions (including overtime and tips) fall below this threshold, meaning Maryland technically conforms. However, this technical conformity provides no benefit to Maryland taxpayers.

The below-the-line structure is the key issue: The OBBBA overtime deduction under IRC §225 is a below-the-line deduction - it reduces federal taxable income (Line 15 of Form 1040), not federal adjusted gross income (Line 11 of Form 1040). Maryland Form 502 starts from federal AGI, not federal taxable income. Because the OBBBA overtime deduction does not reduce federal AGI, it never appears in Maryland's starting point and cannot reduce Maryland taxable income.

County tax compounding: Maryland's mandatory county income tax means the lack of any Maryland benefit is compounded. Overtime is fully taxable at both the state and county level, resulting in a combined rate of 7%–10% depending on the county and income bracket.

Federal Overtime Deduction Quick Reference

DetailValue
IRC Section§225 (OBBBA)
Maximum deduction$12,500 overtime ($25,000 MFJ)
Deduction typeAbove-the-line (Schedule 1-A)
FICA still applies?Yes (Social Security 6.2% + Medicare 1.45%)
MFS eligible?No (MFJ or Single/HoH only)
Effective datesJan 1, 2025 – Dec 31, 2028
Maryland treatmentDoes not conform
What qualifies?Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees

Worked Examples Comparing Federal and Maryland Treatment

Example 1: Warehouse worker in Prince George's County (single filer, $50,000 income, $8,000 overtime premium)

Federal return:
Qualifying overtime premium: $8,000
Overtime deduction claimed: $8,000 (capped at $12,500)
Estimated federal tax savings: $960.00

Maryland return:
Maryland technically conforms to the OBBBA (the overtime deduction falls below Maryland's $5M auto-decoupling threshold), but the OBBBA overtime deduction is below-the-line - it reduces federal taxable income, not federal AGI. Maryland starts its calculation from federal AGI (Form 502), so this deduction never enters the Maryland computation. The full $8,000 in overtime premium pay remains subject to Maryland's 4.75% state income tax plus Prince George's County's 3.20% piggyback tax. Estimated MD state tax on overtime: $380. Estimated county tax: $256. Combined state + county: approximately $636.

Example 2: Nurse in Baltimore County (single filer, $80,000 income, $12,500 overtime premium - federal cap reached)

Federal return:
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00

Maryland return:
Maryland technically conforms to the OBBBA (the overtime deduction falls below Maryland's $5M auto-decoupling threshold), but the OBBBA overtime deduction is below-the-line - it reduces federal taxable income, not federal AGI. Maryland starts its calculation from federal AGI (Form 502), so this deduction never enters the Maryland computation. The full $12,500 in overtime premium pay remains subject to Maryland's 4.75% state income tax plus Baltimore County's 3.20% piggyback tax. Estimated MD state tax on overtime: $593.75. Estimated county tax: $400. Combined state + county: approximately $993.75.

Why Technical Conformity Doesn't Help: The AGI vs. Taxable Income Distinction

This is the critical point for Maryland overtime workers. On a federal Form 1040, there are two key income figures:

The OBBBA overtime and tips deductions reduce taxable income, not AGI. Maryland Form 502 begins with federal AGI - not federal taxable income. As a result, even though Maryland technically conforms to the OBBBA, the deduction structure means Maryland workers get no benefit. Their Maryland taxable income starts from a number that has not been reduced by the OBBBA overtime deduction.

Maryland's County Taxes Make the Impact More Costly

Maryland is one of the few states where local income taxes are mandatory and significant. Every Maryland resident pays a county (or Baltimore City) income tax on the same taxable income used for the state tax. The rates for major jurisdictions in 2026:

For a worker in the 4.75% state bracket in any of these major jurisdictions, the combined rate on overtime income is 7.95% or higher. In Frederick County, the combined rate reaches 8.05%.

Maryland's 2026 High-Earner Brackets

Maryland's FY2026 budget act added two new high-earner brackets: 6.25% on income over $500,000 and 6.5% on income over $1,000,000, effective for tax year 2026. While most hourly workers earning overtime won't reach these brackets, professionals with high base salaries could see their overtime taxed at these elevated rates plus the county piggyback. The theoretical maximum combined rate in Frederick County could reach 9.8%.

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Frequently Asked Questions

Does Maryland tax overtime pay in 2026?
Yes. Overtime pay is fully taxable in Maryland in 2026, despite Maryland technically conforming to the OBBBA. Maryland's auto-decoupling threshold does not trigger for the OBBBA overtime deduction (per the Comptroller's September 5, 2025 analysis). However, the OBBBA overtime deduction (IRC §225) is a below-the-line deduction - it reduces federal taxable income, not federal AGI. Maryland Form 502 starts from federal AGI, so the deduction never enters Maryland's calculation. The practical effect is no Maryland tax benefit for overtime workers. Overtime is taxed at Maryland's graduated state rates (up to 6.5%) plus mandatory county income taxes (2.25% to 3.30%).
Why doesn't the federal overtime deduction automatically reduce my Maryland taxes?
It comes down to where in the federal return the deduction operates. The OBBBA overtime deduction (IRC §225) is a below-the-line deduction - it reduces federal taxable income after AGI is calculated, not AGI itself. Maryland Form 502 starts from federal AGI, not federal taxable income. Because the overtime deduction does not affect federal AGI, it does not flow through to Maryland's starting point. Even though Maryland technically conforms to the OBBBA (the deduction is below the $5M auto-decoupling threshold), the structural mismatch between a below-the-line federal deduction and an AGI-based state starting point means Maryland workers see no benefit.
How do Maryland county taxes affect the total tax on overtime?
Maryland imposes mandatory county-level income taxes on all residents, computed on the same taxable income as the state tax. County rates range from 2.25% to 3.30%. Most major counties (Montgomery, Baltimore County, Howard, Prince George's, Baltimore City) levy 3.20%. Because overtime is fully taxable at both levels, a worker in a 3.20% county pays a combined 7.95% or more on overtime income at the 4.75% state bracket.
What Maryland income tax rate applies to my overtime pay?
Maryland uses a graduated rate schedule. Most overtime workers earning between $3,000 and $100,000 of Maryland taxable income fall in the 4.75% bracket. Higher earners face rates up to 5.75% ($250,000 - $500,000), 6.25% ($500,000 - $1,000,000), or 6.5% (over $1,000,000). The mandatory county tax (2.25% - 3.30%) applies on top of the state rate.
Has Maryland proposed any legislation to adopt the OBBBA overtime deduction?
As of September 2026, no pending Maryland legislation would create a state-level overtime deduction. The existing technical conformity to the OBBBA overtime deduction provides no practical benefit because the deduction is below-the-line (reducing federal taxable income, not federal AGI). For Maryland to provide an overtime benefit, the state would need to enact its own above-the-line deduction or credit - legislation that has not been introduced.
Do I still get the federal overtime deduction on my federal return if I live in Maryland?
Yes. The federal overtime deduction under IRC §225 applies on your federal Form 1040 regardless of where you live. However, because this is a below-the-line deduction (it reduces federal taxable income, not federal AGI), and Maryland starts from federal AGI, the deduction does not reduce your Maryland state or county tax. You benefit federally but not at the state level.