Leaving Maryland in 2026? The New 6.5% Top Bracket, 2% Capital Gains Surtax, and 9.8% Combined Rate That Are Driving High Earners Out

5 days ago
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Introduction: Maryland Just Made Itself the Most Expensive State on the East Coast for High Earners

In May 2025, Governor Wes Moore signed House Bill 350 and House Bill 352 into law, and on January 1, 2026, Maryland became one of the highest-tax states in the country for high earners. The legislation added two brand new income tax brackets at the top of Maryland's progressive system, a 2 percent surtax on capital gains for taxpayers above a federal AGI threshold, an increased cap on county-level local income taxes, and a new 7.5 percent reduction in allowable itemized deductions for high earners. Stack everything together and Maryland's top combined state plus local marginal rate is now 9.8 percent, up from 8.95 percent.

For a household earning $2 million a year, the math is brutal. The 9.8 percent rate is now higher than New York's top state rate of 10.9 percent only at the very top, and once you account for the capital gains surtax and itemized deduction phase-out, Maryland is actively more expensive than New York for many liquidity-event scenarios. For software founders, hedge fund principals, surgeons, and senior executives in the Washington-Baltimore corridor, the financial case for relocating has shifted dramatically in 2026.

The problem with leaving Maryland is the same problem that traps people leaving New York, California, and Massachusetts. The Maryland Comptroller is fully aware of where the money is going, and the state has a documented pattern of challenging residency changes for high earners who try to escape. Maryland aggressively contests "departures" that lack proper documentation, and a residency audit in Maryland can drag on for years, produce six-figure assessments, and undo most of the tax savings you thought you were locking in.

This guide walks through what changed in Maryland for 2026, why so many high earners are now considering an exit, how the Comptroller's residency audits actually work, what evidence wins or loses a Maryland residency case, and what a properly executed move out of Maryland looks like in 2026.

What Actually Changed in Maryland for 2026

The Budget Reconciliation and Financing Act of 2025 (H.B. 352), combined with the FY 2026 budget bill (H.B. 350), made the largest single-year change to Maryland's individual income tax in decades. Five provisions matter for this analysis.

Two new top income tax brackets. Maryland's existing top rate of 5.75 percent stayed in place for income up to $500,000 (single) or $600,000 (joint), but two new brackets were added above it. Income between $500,001 and $1 million (single) or $600,001 and $1.2 million (joint) is now taxed at 6.25 percent. Income above $1 million (single) or $1.2 million (joint) is taxed at 6.5 percent. These rates were retroactively effective to January 1, 2025, meaning they applied to the 2025 tax year (filed in 2026) and continue going forward.

A new 2 percent capital gains surtax. For taxpayers with federal adjusted gross income above $350,000, all net capital gains are now subject to an additional 2 percent surtax on top of regular Maryland income tax. There are limited exceptions, including primary residence sales under $1 million and qualified retirement accounts, but for most high earners realizing investment gains, the surtax applies in full. This is one of the most aggressive state-level capital gains provisions in the country.

Higher local income tax cap. Maryland's 23 counties and Baltimore City impose their own local income taxes, paid on the same return as state tax. The maximum local rate cap was increased from 3.2 percent to 3.3 percent. Many high-income counties (Montgomery, Howard, Prince George's) are now operating at or near the new cap.

Itemized deduction phase-out. Taxpayers with federal AGI above $200,000 (single) or $100,000 (married filing separately) now lose 7.5 percent of their allowable itemized deductions for every dollar of AGI over the threshold. For high earners with substantial mortgage interest, state and local tax (SALT), and charitable deductions, this materially raises effective tax rates above the headline bracket.

Standard deduction expansion (modest). As a partial offset, the standard deduction increased to $3,350 for individuals and $6,700 for joint filers. This helps lower- and middle-income filers but does almost nothing for the high earners affected by the new top brackets.

The combined effect is a tax structure where a Maryland resident earning $2 million in W-2 wages and $1 million in capital gains in 2026 now pays roughly $260,000 to $290,000 in combined state and local income tax, depending on county. That's before factoring in federal tax. For someone considering a move to Florida, Texas, Tennessee, or any of the seven other states with no individual income tax on wages, the swing is enormous. We cover the Florida side of that move in our complete 2026 guide to establishing Florida residency and our Texas residency requirements guide.

For full statutory detail on the 2026 changes, the Tax Foundation's analysis of Governor Moore's budget proposals walks through the final enacted version, and the Citrin Cooperman summary of the FY 2026 budget bill covers the technical mechanics.

Why Maryland Is Now One of the Most Aggressive Audit States

Maryland was not historically considered a top-tier residency audit state. New York, California, Massachusetts, New Jersey, and Connecticut have long been the most aggressive enforcers. Maryland sat in a middle tier. That changed alongside the 2026 tax overhaul.

State revenue departments universally respond to two things: revenue need and demographic shift. Maryland has both. The state faces a projected $3 billion budget deficit in fiscal year 2026, and the new tax brackets are explicitly designed to raise approximately $820 million annually from high earners. If those high earners simply leave the state, the projected revenue does not materialize. The Comptroller's office has every incentive to make sure claimed departures are real.

Three structural features of Maryland law make audits particularly dangerous in 2026.

The new 3-month abode rule. Maryland's statutory residency test, like most states, looks at two things: physical presence and whether you maintain a "permanent place of abode" in the state. What changed in recent guidance is that the abode threshold tightened.

Previously, a property generally needed to be available for at least six months to count as a

permanent abode. As of 2026, three months of availability is enough in certain interpretations. This catches snowbirds and part-time residents who previously relied on the six-month buffer to stay outside the statutory residency net. If you own a Bethesda condo or a vacation home on the Eastern Shore and it is habitable year-round, that property alone can pull you into Maryland residency even if you spend most of the year elsewhere.

The two-layer state plus local structure. Most states have a single income tax. Maryland has two stacked taxes that are administered together: state tax (up to 6.5 percent) and county tax (up to 3.3 percent). When the Comptroller challenges a residency claim, both layers are at stake. A successful audit doesn't just reclassify state-level income — it pulls back local tax revenue too, which counties have lobbied hard to protect.

Reciprocity that has limits. Maryland has reciprocity agreements with Pennsylvania, Virginia, West Virginia, and Washington D.C., but only for wages and salaries earned across borders. Reciprocity does not solve residency questions. A Maryland resident who works in D.C. is still taxed as a Maryland resident on all worldwide income — reciprocity just prevents D.C. from also taxing the wage portion. If you're trying to use a D.C. or Virginia work location to argue you're no longer a Maryland resident, that argument generally fails.

The result is that Maryland in 2026 looks structurally similar to how Massachusetts looked starting in 2023, when the 4 percent millionaire's surtax took effect and the Massachusetts Department of Revenue ramped up residency enforcement. We covered that parallel story in our deep dive on leaving Massachusetts in 2026.

How Maryland Determines Residency

Like most states, Maryland uses two distinct tests, and you can be a resident under either one.

Domicile. Your domicile is your true, fixed, permanent home — the place you intend to return to whenever you are away. Domicile is determined by a multi-factor analysis of intent and actions: where you maintain your most important residence, where your spouse and minor children live, where you vote, where you keep your most valuable possessions, where you bank, where your doctors and other professional relationships are based, and where your business is centered. Maryland presumes that you remain domiciled in the state until you affirmatively prove you've changed domicile to a new state, and the burden of proof in an audit is on the taxpayer, not the state.

Statutory residency. Even if you successfully change your domicile out of Maryland, you can still be taxed as a resident if you (a) maintain a permanent place of abode in Maryland and (b) spend more than half the year there. The Maryland statutory residency test uses the 183-day threshold that most states use, but as discussed above, the abode threshold has tightened. We cover the broader 183-day concept in our complete state-by-state guide to the 183-day rule in 2026 and our 183-day rule explainer.

The trap is that you can lose under either test. You might convincingly establish a new Florida domicile by buying a primary residence there, moving your family, registering to vote, and getting a Florida driver's license, only to be deemed a Maryland statutory resident because you kept your Potomac house and stayed in it for too many nights during the year. Most successful departures from Maryland address both tests simultaneously.

For an overview of what residency means generally, see our explainer on what it actually means to be a tax resident.

What the Maryland Comptroller Looks At in a Residency Audit

The Maryland Comptroller's residency audits resemble those of New York and Massachusetts in structure. Auditors request documentation across roughly seven categories, and the strength of your evidence in each category determines the outcome.

1. Physical presence. Where were you on each day of the audit year? Auditors look for credit card transactions, EZ-Pass records, cell phone tower records (which they can subpoena), airline manifests, hotel and rental receipts, and any other data that establishes your location day by day. They cross-reference this with your reported domicile. If you claim you moved to Florida on March 1 but your credit card shows you bought groceries in Annapolis 200 days that year, the audit goes badly. This is exactly the kind of data fight that GPS-based day tracking is designed to win. See our piece on how states are using your smart meter and cell phone data to prove you didn't really move.

2. Permanent place of abode. Do you own or lease a property in Maryland that's habitable year-round? When did you sell or terminate the lease? If you kept the property, what is its function — vacation home, investment, family use? Auditors are skeptical of "investment property" claims when the property is in the same county as your former primary residence and remains furnished for personal use.

3. Family ties. Where does your spouse live? Where are your minor children enrolled in school? Maryland, like New York, considers family location among the most important factors in determining domicile. A high earner who moves to Florida while their spouse and children remain in Bethesda usually loses the residency argument.

4. Items "near and dear." Where do you keep your most personally significant possessions — family photographs, heirlooms, art, jewelry, important documents? Auditors increasingly request photographs of both residences and inventories of valuable property. The home that contains your wedding album and your grandmother's painting is presumptively your domicile.

5. Business and professional ties. Where is your business or professional practice centered? Where do you go to the doctor, the dentist, the dermatologist? Where do you bank? Where do you belong to clubs, religious organizations, or civic groups? Each of these is a "tie" that can pull you back to Maryland if you didn't cut it.

6. Active vs. passive ties. Owning a Maryland LLC is different from actively managing one from Maryland. Auditors distinguish between passive investment in Maryland businesses (which has limited weight) and active operational involvement (which is strong evidence of continued domicile).

7. Time of the move and surrounding events. Did you move shortly before a major liquidity event like a business sale, IPO, or large stock vesting event? Maryland, like California and New York, specifically flags moves that conveniently precede taxable events. The optics are bad, and the documentation burden is higher when the timing looks tactical.

For a more detailed treatment of how a state actually builds a residency case, the Sam Brotman Law guide to surviving a California residency audit is one of the best non-Maryland resources on the methodology, and the same principles apply.

A 10-Step Action Plan for Leaving Maryland in 2026

If you are seriously considering a departure from Maryland because of the new tax structure, here is the order of operations that practitioners generally recommend. The point of this list is not just to physically move but to build the documentary record that survives a Comptroller audit.

Step 1: Pick a destination state and understand its rules. The most common destinations from Maryland are Florida (warm, no income tax, large established expat community), Texas (no income tax, business-friendly), Tennessee (no income tax, lower cost of living), and Pennsylvania (lower top rate, reciprocity simplifies wages). Pick one and commit. Splitting time between multiple no-tax states does not solve the problem because Maryland still has a domicile claim.

Step 2: Establish primary residence in the new state. Buy or sign a long-term lease on a residence in the new state that is genuinely your primary home. It should be in a location consistent with your stated lifestyle — coastal Florida if you're claiming to be a snowbird, urban Austin if you're claiming to work from Texas. Rented short-term Airbnbs and modest condos in destinations you've never lived in before draw scrutiny.

Step 3: Move your family. If your spouse and minor children stay behind in Maryland, the domicile argument is extremely hard to win. Audits almost always go for the state where the family lives. If you cannot move the whole family (children mid-school year, spouse with Maryland employment), document the timeline of when they will follow and have a clear plan.

Step 4: Change all official documentation in the new state. Driver's license, vehicle registration, voter registration. Update your address with the IRS, banks, brokerages, employers, professional licensing boards, and the post office. Cancel Maryland voter registration in writing.

Step 5: Sell or convert the Maryland home. This is the hardest step for most people. Selling is cleanest. Renting it on a long-term lease to an unrelated party is acceptable if documented. Keeping it available for personal use is the single biggest red flag in a Maryland residency audit. If you keep it, expect to be challenged on the abode prong of statutory residency.

Step 6: Move your professional and medical relationships. New primary care doctor, dentist, accountant, attorney, financial advisor in the new state. Close or move Maryland-based bank accounts. End country club, gym, and other recurring memberships in Maryland. Each tie that remains is a thread the Comptroller can pull on.

Step 7: File a Maryland part-year resident return for the year of the move. This officially closes the chapter on Maryland residency. Filing a full-year resident return for the year you claim to have moved contradicts your departure narrative. Filing a part-year return notifies the state of your effective move-out date.

Step 8: Track every day in every state going forward. This is non-negotiable. The single biggest piece of evidence in any residency case is contemporaneous proof of where you physically were on each day of the year. Auditors do not believe reconstructed day counts from credit card statements. They believe automatically generated GPS records. This is exactly the gap that iReside was built to close, and we cover the broader case in our importance of tax residency tracking guide.

Step 9: Stay under 183 days in Maryland for the foreseeable future. Even after you cleanly establish a new domicile, you can still be pulled back into Maryland residency under the statutory test if you spend more than half the year there with an available abode. The 183-day line is the bright-line trigger. Many former Maryland residents who didn't track carefully have crossed it accidentally over the course of several long visits.

Step 10: Maintain the documentation forever. Maryland residency audits often happen two, three, or four years after the move. The IRS shares federal address and income data with states on a 2-3 year lag, and audit triggers often come from that data. Keep your records permanently. We cover the contemporaneous documentation point in detail in our piece on how the New York Department of Taxation and Finance tracks former residents — the same playbook applies in Maryland.

The Specific Trap of the New 3-Month Abode Rule

This deserves its own section because it has caught off guard a lot of high-income Marylanders who thought they had a safe arrangement. Under the older interpretation, a property that you owned in Maryland generally counted as a "permanent place of abode" only if it was available to you for at least six months of the year. That gave snowbirds and part-time residents a workable buffer — you could own a Maryland house, spend up to six months there, and so long as you didn't cross the 183-day line, you were structurally outside the statutory residency net.

Recent guidance has tightened the abode threshold so that as little as three months of availability can qualify a property as a permanent place of abode. The full implications are still being worked out in practice, but the direction is clear: more properties now count as abodes, which means more part-year Maryland residents are now exposed to statutory residency claims.

For someone who owns both a Maryland house and a Florida house and divides time between them, the new framework looks like this: if your Maryland house is fully furnished and available for use most of the year (most are), it now likely qualifies as an abode under the tightened standard. Your day count becomes the only thing protecting you. Cross 183 days in Maryland and you're a statutory resident regardless of where your driver's license says you live.

The practical implication is that day tracking has gone from "nice to have" to "essential" for anyone with a Maryland property they're not willing to sell. The buffer that used to exist no longer exists.

What If You Just Want to Reduce, Not Eliminate, Maryland Tax?

Not every high earner can or wants to leave Maryland entirely. For families with kids in Maryland schools, spouses with Maryland-based careers, or business owners with deep Maryland customer bases, a clean exit isn't always practical. A partial-mitigation strategy exists, but it has limits.

Time your liquidity events. If you have a foreseeable taxable event (a business sale, RSU vesting cliff, real estate sale), aligning the move to occur before that event has significant tax value — but it also draws audit attention. The optics need to be clean: ideally, you've been planning the move for reasons unrelated to the liquidity event, you have a documented timeline, and you've severed Maryland ties well in advance.

Don't realize gains in Maryland. The 2 percent capital gains surtax is one of the most painful provisions of the 2026 reform. To the extent you can delay realizations, gift appreciated assets to lower-income family members, hold positions through your move out of state, or use qualified opportunity zones or other gain-deferral structures, every dollar of Maryland-taxed gains is a dollar with a 2 percent surcharge. Tax planning at this level needs a qualified professional, not a blog post — but the broad principle is that Maryland 2026 makes capital gains realizations especially expensive.

Watch the local layer. Counties have different local rates. Worcester County is at 2.25 percent, Montgomery and Howard at 3.2-3.3 percent. If you're staying in Maryland and have flexibility on where in Maryland you live, county choice can matter materially.

For nonresidents working in Maryland. If you live elsewhere and work in Maryland, the nonresident local rate is now a flat 2.25 percent (up from 2.0 percent), and the combined state plus local nonresident top rate is 8.75 percent. This is still less than full Maryland residency exposure, but the gap narrowed in 2026.

Frequently Asked Questions About Leaving Maryland in 2026

Q: When did Maryland's new 6.25% and 6.5% tax brackets actually take effect?

The new brackets were enacted in 2025 and applied retroactively to tax year 2025 (returns filed in 2026). They continue in effect for tax year 2026 and beyond. The 2 percent capital gains surtax also took effect for tax year 2025.

Q: Is the 9.8% top rate really higher than New York's?

For the very top tier, no. New York's top state rate is 10.9 percent, and New York City residents pay an additional ~3.876 percent local tax on top of state tax, for a combined top rate that exceeds 14 percent. Maryland's combined 9.8 percent (state plus county) is higher than most other East Coast states except New York. But when you include the 2 percent capital gains surtax and the itemized deduction phase-out, Maryland can be more expensive than New York for certain capital-gain-heavy scenarios, particularly for residents outside New York City.

Q: Can I move to Florida or Texas mid-year and stop paying Maryland tax?

You can become a part-year resident, which means Maryland tax applies only to income earned while you were a Maryland resident. The catch is proving exactly when you became a non-Maryland resident, which requires the documentation steps in the action plan above. Doing this for a mid-year move is harder than doing it at year-end.

Q: What if I keep my house in Maryland?

You can, but you increase your statutory residency exposure significantly under the 2026 abode rules. The practical advice is: either sell or genuinely lease out the property to an unrelated party, or track your Maryland days like a hawk and never cross 183. The single biggest reason departures fail audit is when the former resident kept a house "for occasional visits" and ended up spending more than half the year there.

Q: How long after I move can Maryland audit me?

Maryland generally has a three-year statute of limitations from the filing date for a normal audit, but the clock can be extended in cases involving substantial underreporting, and indefinitely in cases of fraud. In practice, residency audits often happen two to three years after the move, when IRS data sharing surfaces the change.

Q: Does Maryland recognize the federal Foreign Earned Income Exclusion?

Maryland conforms to federal AGI as the starting point for state tax. The FEIE reduces federal AGI, which means Maryland does effectively benefit from the exclusion for residents working abroad — making Maryland one of the more favorable states for U.S. expats compared to California or Massachusetts, which do not recognize the FEIE. We cover the federal mechanics in our piece on Physical Presence Test vs. Bona Fide Residence Test.

Q: What if my employer is in Maryland but I work remotely from another state?

Maryland is not a "convenience of the employer" state, which means your wages are generally sourced to where you physically perform the work, not where the employer is based. That's better treatment than New York, Pennsylvania, Delaware, Nebraska, or Connecticut residents get. We cover the convenience rule states in detail in 7 states can tax you even if you never set foot there.

The Bottom Line

Maryland's 2026 tax overhaul materially changed the calculus for high earners. The combination of two new top brackets, a 2 percent capital gains surtax, an itemized deduction phase-out, and a higher local tax cap means an effective top combined rate of 9.8 percent on wages, with an effective rate well above 11 percent on capital gains for many high earners. For someone earning $2 million in mixed wages and gains, the Maryland tax bill is now competitive with New York.

The financial case for leaving has never been stronger, and Florida, Texas, Tennessee, and the seven other no-income-tax states are seeing the result in growing Maryland-to-Sunbelt migration data. But Maryland is also a state that, like New York and Massachusetts before it, has every incentive to challenge claimed departures. The Comptroller is not going to make this easy.

The single highest-leverage thing any departing Maryland resident can do is establish an automatic, contemporaneous record of where they physically were each day. Every other piece of the puzzle — the new driver's license, the voter registration, the part-year return, the Florida home — is necessary but defensible only if your day count holds up under scrutiny. Reconstructed credit-card-statement timelines built two years after the fact don't survive audits. GPS-generated logs do.

That's exactly what iReside does. The app uses GPS to automatically track which state and country you are in every day, alerts you before you approach the 183-day line in any jurisdiction, and generates professional PDF reports your CPA or a Comptroller auditor can verify. No manual logging, no spreadsheets, no scrambling to reconstruct your year when an audit letter arrives. Just a clean, defensible record from the day you start.

If you're considering leaving Maryland in 2026, start tracking before you go. The data you capture in the weeks leading up to your move is the data that proves your departure was real.

Start your free iReside trial today and turn day tracking from your biggest tax risk into your strongest defense.

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