On January 15, 2025, Maryland Governor Wes Moore unveiled his FY 2026 budget proposal, introducing sweeping tax reforms to address a $3.3 billion deficit. After months of negotiations, the Maryland General Assembly passed the $67 billion budget, incorporating $1.6 billion in new taxes and fees, on April 7, 2025—the final day of the legislative session. These changes, enacted through the Budget Reconciliation and Financing Act, will reshape financial and estate planning for Maryland residents starting July 1, 2025, with some provisions phased in later. For those with significant assets, these reforms demand immediate attention to preserve wealth and adapt estate plans effectively.
Key tax changes include:
- New Income Tax Brackets for High Earners: A 6.25% rate for incomes between $500,000 and $1 million, and 6.5% for incomes above $1 million.
- 2% Capital Gains Surtax: Applied to individuals with federal adjusted gross income over $350,000, increasing the tax burden on investment gains.
- 3% Sales Tax on IT and Data Services: Affecting both businesses and consumers, potentially raising costs for tech-reliant estates.
- Vehicle Tax Increases: The vehicle excise tax rises from 6% to 6.5%, with a new 3.5% tax on rental vehicles.
Most of these changes take effect July 1, 2025, aligning with Maryland’s fiscal year. The new income tax brackets and capital gains surtax stand out as game-changers for estate planning. For high-net-worth individuals, the increased income tax rates will erode disposable income, potentially reducing the funds available for lifetime gifting—a key strategy to minimize estate taxes. The 2% capital gains surtax directly targets investment portfolios, a cornerstone of many estate plans, raising the cost of selling appreciated assets like stocks, real estate, or business interests. This could shrink the net value transferred to heirs or trusts, especially for estates relying on growth assets to fund bequests or charitable goals.
These tax hikes may necessitate a shift in strategy. For example, accelerating gifts before July 1, 2025, could lock in current tax rates and reduce taxable estate size, leveraging the federal lifetime gift tax exemption ($13.61 million in 2025, adjusted annually). Alternatively, trusts—such as irrevocable life insurance trusts (ILITs) or grantor retained annuity trusts (GRATs)—could become more attractive to shield income and gains from these new taxes while maintaining control over asset distribution. The IT services tax adds another layer, increasing administrative costs for estates using digital platforms, cybersecurity, or data management services—expenses often overlooked in planning until they accumulate.
Beyond income and investments, the vehicle tax increases may subtly affect estate liquidity. For families with car collections or trusts holding titled vehicles, the higher excise taxes could complicate asset transfers or sales to cover estate settlement costs. While less immediate, the delayed cannabis tax hike (effective FY 2028) signals a broader trend of taxing alternative income streams, which could influence long-term planning for diversified estates.
With these reforms now law, Marylanders—particularly those with estates nearing or exceeding $500,000 in annual income or $350,000 in gains—must act swiftly. Reviewing your estate plan before July 1, 2025, is critical to mitigate the impact. Options might include rebalancing portfolios to prioritize tax-efficient assets, revisiting trust funding, or adjusting charitable giving to offset taxable income. Frame & Frame is here to help you navigate these changes, ensuring your estate plan remains robust and tax-smart. Contact us today to explore tailored strategies that protect your legacy in this new tax landscape.