Income Tax - Addition Modification for Federal Tax-Exempt Income - Study
HB0694 makes a targeted change to Maryland’s income tax addition modification rules for certain federally tax-exempt income and directs the Office of the Comptroller to study the issue. The bill states that the study/report requirement does not apply to foreign earned income within the meaning of Internal Revenue Code § 911(b)(1), subject to the limitation in § 911(b)(2). It also requires the Comptroller, by December 1, 2026, to report to the Governor and General Assembly on the number of residents with foreign earned income, the amount above the federal exclusion limit, and the countries from which that income was earned.
On the tax side, the bill amends Maryland Tax-General § 10-204(c)(1) so that the State’s addition modification for income exempt from federal tax but not State tax does not apply to certain foreign earned income. In practical terms, this narrows the types of federally excluded compensation that must be added back into Maryland adjusted gross income, while preserving the general rule for other salary, wages, or compensation exempt from federal tax by law or treaty. The bill takes effect July 1, 2026, and applies to taxable years beginning after December 31, 2025.
HB0694 amends Maryland Tax-General § 10-204 to carve out certain foreign earned income from the State’s addition modification for federally tax-exempt income, thereby affecting how Maryland adjusted gross income is calculated for residents with qualifying overseas earnings. It also creates a one-time study and reporting obligation for the Comptroller to gather data on affected taxpayers and the countries involved, which could inform future tax policy changes. The bill does not broadly repeal the addition modification, but it does narrow its application for a specific category of income.
The available legislative history suggests the bill moved forward without recorded opposition: it was reported favorably with amendments in committee and adopted by the House. No committee transcript or vote detail is provided, so there is no evidence of a divided debate in the materials supplied. Overall, the bill appears to have been treated as a technical tax-policy measure with a data-gathering component rather than a highly contentious proposal.
The main policy issue is whether Maryland should continue to require an addition modification for income that is exempt from federal tax under foreign earned income rules. Supporters of the carveout likely view it as a fairness or conformity adjustment for residents working abroad, while any concern would center on reduced State revenue or the precedent of creating special exclusions within the income tax base. The study requirement also signals some uncertainty about the scope and fiscal effect of the change, but no explicit objections or competing positions are included in the provided materials.