This bill adds a subtraction modification to Maryland income tax law allowing taxpayers to subtract the amount of "qualified overtime compensation" referenced in Internal Revenue Code §225 when computing Maryland adjusted gross income. The statute achieves this by adding subsection (dd) to §10‑208 and by expressly incorporating the federal definition of qualified overtime compensation.
The change is temporary: it takes effect July 1, 2026, applies to taxable years beginning after December 31, 2025 and before January 1, 2029, and automatically sunsets on June 30, 2029. Practically, the bill delivers targeted state tax relief to workers who receive overtime pay, creates new compliance and reporting tasks for payroll processors and the Comptroller, and produces a measurable but time‑limited revenue impact for Maryland’s general fund.
At a Glance
What It Does
The bill amends Article – Tax – General by adding a new subsection that lets Maryland residents subtract "qualified overtime compensation" (as defined in IRC §225) from their federal adjusted gross income when calculating Maryland adjusted gross income. It references the federal statute for the definition and the amount allowed as a deduction. The provision is explicitly temporary and includes an automatic abrogation date.
Who It Affects
Directly affected are Maryland taxpayers who receive overtime pay, tax preparers and payroll processors who must identify and report qualified overtime compensation, and the Comptroller’s office which must update forms and instructions. State budget and revenue officials are also affected because the subtraction reduces taxable income and therefore state income tax receipts during the effective period.
Why It Matters
By tying a state subtraction to a specific federal code section, Maryland delivers targeted relief without drafting a new state definition, but it also outsources part of the rule‑making to federal tax law. The temporary, three‑year nature concentrates the fiscal impact into a near‑term window and creates a policy 'cliff' at repeal that will matter to revenue forecasting, employers’ payroll systems, and benefit programs that use AGI tests.
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What This Bill Actually Does
The bill inserts a new, explicit subtraction into the list of items Maryland residents may remove from federal adjusted gross income when calculating Maryland adjusted gross income. Instead of defining overtime pay separately at the state level, the bill simply adopts the term "qualified overtime compensation" by reference to Internal Revenue Code §225 and allows the amount permitted under that federal provision to be subtracted on the Maryland return.
Operationally, the subtraction reduces taxable state income for individuals who receive qualifying overtime, which lowers Maryland income tax liabilities for those taxpayers. Because the bill points to the federal code for both the definition and the deductible amount, a taxpayer’s eligibility for the state subtraction will track the taxpayer’s position on the federal return: if the amount qualifies under §225 for federal purposes, it will be available to subtract for Maryland purposes.Although the text does not change withholding rules directly, employers, payroll vendors, and tax preparers will need to identify qualified overtime compensation, flag it in payroll reporting, and advise employees about the subtraction — particularly because the state subtraction may require additional reporting fields or guidance on the Maryland return.
The Comptroller will need to revise instructions, update electronic filing schemas, and prepare for compliance checks.The provision is strictly time‑limited. It becomes effective mid‑2026, applies to tax years beginning in 2026–2028, and sunsets automatically at the end of June 2029.
That temporary design concentrates the fiscal cost and creates administrative churn — taxpayers and preparers must track the rule for only a few years, then revert to pre‑existing law unless the General Assembly extends the provision.Because Maryland ties the subtraction to federal tax law, future changes at the federal level to IRC §225 (amendments, interpretations, or IRS guidance) will change who qualifies in Maryland without separate state action. That linkage simplifies legislative drafting but complicates state compliance and forecasting.
The Five Things You Need to Know
The bill adds subsection (dd) to Maryland Tax – General §10‑208 to permit a subtraction of "qualified overtime compensation" as defined in IRC §225 when calculating Maryland adjusted gross income.
It expressly adopts the federal definition and the amount "allowed as a deduction under §225 of the Internal Revenue Code," so Maryland eligibility tracks federal treatment of the same income.
Effective date is July 1, 2026; it applies to taxable years beginning after December 31, 2025 and before January 1, 2029.
The statute is temporary and automatically abrogates on June 30, 2029 — the subtraction is available only for tax years roughly within 2026–2028.
The bill does not change federal withholding rules; instead it creates a state subtraction that will require return reporting changes and likely updates to payroll reporting and tax software.
Section-by-Section Breakdown
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Housekeeping: preserves current list of subtractions
The bill repeals and reenacts §10‑208(a) without substantive amendment. This is procedural: it preserves the existing statutory framework for enumerated subtractions and prepares the statute for the insertion of a new subsection. Practically, this step avoids unintended gaps in the list of subtractions when the new provision is added and signals the drafters’ intent to leave existing subtractions intact.
Creates a subtraction for qualified overtime compensation
This is the core change: the statute instructs that the subtraction list includes the amount of "qualified overtime compensation" allowed as a deduction under IRC §225, and it delegates the definitional work to the federal code. For Maryland returns, that means taxpayers who can claim the §225 deduction on their federal return will be able to remove the same amount from federal AGI for Maryland tax purposes. The practical implication is a targeted reduction in Maryland taxable income for qualifying overtime earners.
Three‑year window and automatic abrogation
Section 2 sets a July 1, 2026 effective date and limits application to taxable years beginning after December 31, 2025 and before January 1, 2029. It further states that the act will remain in force for three years and will be abrogated automatically on June 30, 2029. That creates a finite policy experiment rather than a permanent law change, which matters for budgeting, compliance planning, and any stakeholder decisions that depend on multi‑year certainty.
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Who Benefits
- Overtime‑earning employees (hourly and nonexempt salaried workers): They receive direct state tax relief on the portion of pay that qualifies under IRC §225, increasing take‑home pay for those who report qualifying overtime.
- Tax preparers and payroll advisers: Demand for professional assistance will rise as workers and employers navigate eligibility and claim the subtraction, creating billing and advisory opportunities.
- Employers in tight labor markets and sectors reliant on overtime (healthcare, manufacturing, logistics): The policy makes overtime more attractive to employees without raising employer wage costs directly, which can aid retention and recruiting.
Who Bears the Cost
- Maryland General Fund and state budget planners: Lost income tax revenue during the three‑year window reduces available funds or forces offsets elsewhere, and the temporary nature complicates multi‑year projections.
- Comptroller’s office and tax administrators: They must update tax forms, e‑file schemas, guidance, and audit procedures; those administrative costs are borne by the agency unless separately budgeted.
- Payroll processors and HR departments: Although the bill does not change federal withholding, these entities must add tracking and reporting for qualified overtime compensation, update software, and respond to employee questions — all of which entail implementation costs.
- Means‑tested programs and benefit administrators: Reductions in AGI can change eligibility for state credits or programs that use AGI thresholds, potentially shifting administrative burden and program costs.
Key Issues
The Core Tension
The bill balances targeted worker tax relief against state fiscal discipline and administrative complexity: it avoids inventing a state definition by importing IRC §225, which speeds legislative drafting but hands Maryland’s policy outcomes to federal tax changes and forces the state into costly, time‑sensitive implementation — all for a benefit that expires after three years, creating both a fiscal hit and a planning cliff with no simple resolution.
The bill’s reliance on IRC §225 simplifies state drafting but creates several administrative and interpretive challenges. First, Maryland will have to decide how to treat taxpayers who are denied the federal deduction but claim uncertainty later—will the state require federal treatment as conclusive, or will it permit state‑level contests?
Second, because the subtraction mirrors federal treatment, any federal changes to §225 (amendments, regulation, or IRS guidance) will alter Maryland outcomes without legislative action, complicating revenue forecasting and compliance consistency.
The temporary, three‑year design reduces long‑term fiscal exposure but creates a policy cliff. Taxpayers and employers who adjust payroll practices or compensation strategies around the subtraction face uncertainty after sunset.
Administrative timing is another tension: the Comptroller and private payroll vendors must implement changes in mid‑2026 for tax years starting January 1, 2026, which is a tight window for systems, training, and communications. Finally, the distributional picture is mixed: the benefit targets overtime recipients but will scale with overtime pay amounts, meaning higher overtime earners capture proportionally more relief — a point analysts should watch when assessing equity and labor incentives.
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