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My husband retired from Federal employment, and they didn't take out any Maryland state tax which I didn't notice. Now I'm worried about 2015 taxes which I haven't completed yet. Could this be that it's not a mistake but because it's an annuity (that's what it says on the paper that looks like a regular thing you'd file with your taxes) taxes aren't due on this money at the state level or did they screw us badly?

We called and now have money taken out mainly because I receive Social Security disability payments so that helps with the taxes on them. He was under the FERS program forced out at 57 yrs of age due to his position.

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Maryland treats income from pensions and annuities in the same manner that the federal government treats such income. Consequently, pensions and annuities can be subject to Maryland's income tax.

The resident booklet for Maryland income tax filers states on page 4:

Line 1d. Enter on line 1d the total amount of pension, IRA, and annuities reported as income on lines 15b and 16b of your federal Form 1040, or lines 11b and 12b of your federal Form 1040A.

Line 1 of Maryland's tax return represents total taxable income, before deductions, exemptions, and adjustments. Line 16b of federal Form 1040 represents the taxable portion of your FERS annuity. Consequently, the federally taxable portion of your FERS annuity is also subject to Maryland's state income tax. The taxable portion of FERS annuities should be recorded on the 1099-R you receive. If it's not, IRS pub 721 records how to calculate the taxable portion of FERS annuities.

Maryland does, however, allow filers to exclude up to $29,200 of the taxable portion of their pension income in 2015 from taxable income if:

a. You were 65 or over or totally disabled, or your spouse was totally disabled, on the last day of the tax year, AND

b. You included on your federal return taxable income received as a pension, annuity or endowment from an “employee retirement system” qualified under Sections 401(a), 403 or 457(b) of the Internal Revenue Code. [A traditional IRA, a Roth IRA, a simplified employee plan (SEP), a Keogh plan, an ineligible deferred compensation plan or foreign retirement income does not qualify.]

You mention receiving SS disability, so you may be eligible for that exclusion. Regarding what kinds of disabilities qualifies for those exclusions, Maryland states that:

To be considered totally disabled, you must have a mental or physical impairment which prevents you from engaging in substantial gainful activity. You must expect the impairment to be of long, continued or indefinite duration or to result in your death. You must attach to your return a certification from a qualified physician stating the nature of your impairment and that you are totally disabled. If you have previously submitted a physician’s certification, attach your own statement that you are still totally disabled and that a physician’s certification was submitted before.

If you feel you would qualify for that exclusion (and have the required supporting evidence), fill out the relevant table and include the result on line 10 of your Maryland tax return.

In the future, to avoid a large state tax bill due to inadequate withholding on pension funds, OPM provides a web service which allows you to specify state tax withholding amounts on pension distributions.

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