Income Tax - Addition Modification for Federal Tax-Exempt Income - Study
Summary
SB0163 makes a targeted change to Maryland’s income tax rules for federal tax-exempt income and directs the Comptroller to study certain foreign earned income. The bill amends the state’s addition modification for income that is exempt from federal tax by federal law or treaty but not exempt from Maryland tax, and it carves out foreign earned income within the meaning of Internal Revenue Code § 911(b)(1), subject to the federal limitation in § 911(b)(2). In practical terms, this means some foreign earned income will no longer be added back into Maryland adjusted gross income under the affected provision.
The bill also requires the Office of the Comptroller to report by December 1, 2026, on the number of Maryland residents with foreign earned income, the number whose foreign earned income exceeds the federal exclusion limit, the aggregate amount of that excess income, and the countries from which that income was earned. The act applies to taxable years beginning after December 31, 2025, and took effect July 1, 2026.
Impact
SB0163 amends Maryland Tax-General § 10-204 to exclude certain foreign earned income from the state’s addition modification for federal tax-exempt income, thereby narrowing the types of income that must be added back when calculating Maryland adjusted gross income. It also imposes a one-time reporting obligation on the Comptroller’s Office to collect and analyze data on residents’ foreign earned income and related countries, which may inform future tax policy. The bill affects individual income taxpayers with foreign earned income and the state tax administration process, but it does not broadly overhaul Maryland’s income tax structure.
Sentiment
The bill appears to have been broadly noncontroversial and received unanimous support in both chambers, passing the Senate 42-0 and the House 129-0, with no recorded opposition in the available materials. The lack of committee transcript discussion suggests the measure was treated as a technical or narrowly tailored tax policy adjustment rather than a major partisan issue. Overall sentiment was favorable, with lawmakers approving both the study component and the substantive tax clarification.
Contention
The main policy issue is the treatment of foreign earned income that is excluded from federal tax under IRC § 911. The bill resolves that such income is not subject to Maryland’s addition modification, which benefits residents working abroad and reduces uncertainty in state tax treatment. Any potential concern would likely center on revenue effects or the scope of the exclusion, but no explicit opposition or debate is reflected in the available record. The study requirement also suggests lawmakers wanted more data before considering any broader changes to taxation of federal tax-exempt income.