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Tax Year 2026Updated July 13, 2026

Does Maryland Tax Tips in 2026?

Yes - Maryland taxes tip income in 2026, despite technically conforming to the OBBBA. Maryland's auto-decoupling threshold does not trigger for the OBBBA tips deduction (per the Comptroller's September 5, 2025 analysis), so Maryland technically conforms. However, the OBBBA tips deduction (IRC §224) 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 tipped workers. All tip income 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 Tips Tax Treatment Works

Maryland's treatment of the OBBBA tips 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 tips and overtime) 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 tips deduction under IRC §224 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 tips deduction does not reduce federal AGI, it never appears in Maryland's starting point and cannot reduce Maryland taxable income.

County tax compounding: Maryland is one of the few states with mandatory county-level income taxes. Because the county tax is computed on the same Maryland taxable income, the lack of any Maryland benefit is compounded. A tipped worker pays the state rate plus their county rate on tip income, with no deduction at either level.

Federal Tips Deduction Quick Reference

DetailValue
IRC Section§224 (OBBBA)
Maximum deduction$25,000 tips
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

Worked Examples Comparing Federal and Maryland Treatment

Example 1: Restaurant server in Montgomery County (single filer, $40,000 income, $15,000 in tips)

Federal return:
Qualified tip income: $15,000
Tips deduction claimed: $15,000 (capped at $25,000)
Estimated federal tax savings: $1,800.00

Maryland return:
Maryland technically conforms to the OBBBA (the tips deduction falls below Maryland's $5M auto-decoupling threshold), but the OBBBA tips 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 $15,000 in tip income remains subject to Maryland's 4.75% state income tax plus Montgomery County's 3.20% piggyback tax. Estimated MD state tax on tips: $712.50. Estimated county tax: $480. Combined state + county burden on tips: approximately $1,192.50.

Example 2: Bartender in Montgomery County (single filer, $70,000 income, $25,000 in tips - federal cap reached)

Federal return:
Qualified tip income: $25,000
Tips deduction claimed: $25,000 (capped at $25,000)
Estimated federal tax savings: $5,500.00

Maryland return:
Maryland technically conforms to the OBBBA (the tips deduction falls below Maryland's $5M auto-decoupling threshold), but the OBBBA tips 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 $25,000 in tip income remains subject to Maryland's 4.75% state income tax plus Montgomery County's 3.20% piggyback tax. Estimated MD state tax on tips: $1,187.50. Estimated county tax: $800. Combined state + county: approximately $1,987.50.

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

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

The OBBBA tips and overtime 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 tips deduction.

Maryland's County Piggyback Tax Amplifies the Impact

Unlike most states, Maryland requires all counties and Baltimore City to impose a local income tax on the same taxable income used for the state tax. County rates range from 2.25% (the statutory minimum) to 3.30% (Frederick County). Most of Maryland's most populous jurisdictions - Montgomery County, Baltimore County, Howard County, Prince George's County, and Baltimore City - impose a 3.20% rate.

This means a tipped worker earning in the 4.75% state bracket in Montgomery County faces a combined 7.95% effective rate on their tip income, with no deduction at either the state or county level.

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. While most tipped workers will not reach these brackets, higher-income workers with significant tip income could face these elevated rates. Combined with the county piggyback tax, the top combined rate in Maryland can exceed 9.8%.

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Frequently Asked Questions

Does Maryland conform to the federal 'no tax on tips' deduction under the OBBBA?
Technically yes, but with no practical benefit. Maryland's auto-decoupling threshold applies only to provisions that cost more than $5 million in lost revenue; the OBBBA tips deduction falls below that threshold per the Comptroller's September 5, 2025 analysis. However, this technical conformity does not help tipped workers: the OBBBA tips deduction is a below-the-line deduction that reduces federal taxable income, not federal AGI. Maryland starts its income tax calculation from federal AGI (Form 502). Because the deduction never reduces federal AGI, it never enters Maryland's computation at all. The practical effect is no Maryland tax benefit for tipped workers.
Why doesn't the federal tips deduction automatically reduce my Maryland taxes?
It comes down to where in the federal return the deduction operates. The OBBBA tips deduction (IRC §224) 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 tips deduction does not affect federal AGI, it does not flow through to Maryland's starting point. Maryland taxpayers claiming the federal tips deduction on Schedule A (or as an above-the-line item) would see it carry through, but the OBBBA deduction is structured differently. The result: tip income remains fully taxable in Maryland regardless of the technical conformity status.
What Maryland income tax rate applies to my tip income?
Maryland uses a graduated rate schedule with 10 brackets. Most tipped workers earning between $3,000 and $100,000 of Maryland taxable income fall in the 4.75% bracket. Higher earners face rates of 5% to 6.5%. In addition, all Maryland residents pay a mandatory county income tax (2.25% to 3.30%) on the same taxable income, making the effective combined rate 7% to nearly 10%.
How do Maryland county taxes affect the impact of non-conformity on tipped workers?
Maryland is unique in imposing mandatory county-level income taxes that piggyback on the state tax base. Because tips remain fully taxable at both the state and county level, the non-conformity impact is amplified. A tipped worker in a county with a 3.20% rate (Montgomery, Baltimore County, Howard, Prince George's, Baltimore City) pays nearly 8% combined on their tip income - significantly more than in states without local income taxes.
Has Maryland proposed any legislation to create a state tips deduction?
As of September 2026, no pending Maryland legislation would create a state-level tips income deduction. The existing technical conformity to the OBBBA tips deduction provides no practical benefit because the deduction is below-the-line (reducing federal taxable income, not federal AGI). For Maryland to provide a tips 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 tips deduction on my federal return if I live in Maryland?
Yes. The federal tips deduction under IRC §224 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.