Introduction: Expat Tax Maryland Planning for British Families in Bethesda
The expat tax Maryland bill changed sharply in 2025, and most British families in Bethesda have not yet noticed. Maryland added two new top brackets of 6.25% and 6.5%, a 2% surtax on capital gains for high earners, and a steep cut to itemised deductions. On top of that, every Maryland resident pays a county income tax, which is 3.2% in Montgomery County. Consequently, a British household with a London flat and a UK share portfolio can now face a combined state and county rate of 11.7% on its UK gains, with no credit for any tax paid to HMRC.
At TaxYork, we prepare federal, state and UK returns for British executives, scientists, World Bank and embassy families, founders and retirees across Bethesda, Chevy Chase, Potomac, Rockville and Silver Spring. In our experience, most arrive expecting the US-UK treaty to protect them at every level. It does not reach Annapolis at all. Therefore the expat tax Maryland question is which British income Maryland taxes in full, how the new 2025 rules raise the cost, and how your residency dates shape both answers.
Expat Tax Maryland Basics: Four Layers and No Bridge
A British family in Bethesda deals with four income tax layers. First, federal tax reaches worldwide income, relieved by the credit on IRS Form 1116. Second, HMRC keeps taxing UK property income and UK land gains. Third, Maryland taxes residents on everything in federal adjusted gross income. Fourth, the county adds its own income tax on the same base. Between Maryland and Britain there is no bridge at all, because Maryland's credit covers other US states only.
Who This Guide Is Written For
This guide addresses high-net-worth British nationals, dual national US UK families and accidental Americans living in Maryland. Specifically, it suits senior executives, investment professionals, medical and research scientists, company owners and retirees who still hold UK property, pensions, ISAs or companies. If that describes your family, the expat tax Maryland rules below decide how much of your British wealth survives four layers of tax.
How Maryland Compares With Our Other State Guides
Maryland now sits near the top of our series for high earners. Its combined 9.7% top rate on ordinary income beats Virginia's 5.75%, which at least credits UK tax on some pensions, and Connecticut's 6.99%. It also exceeds Pennsylvania plus the Philadelphia wage tax. For the federal groundwork that applies wherever you live, start with our complete guide to UK expat tax in the USA.
How Maryland Taxes High Earners After the 2025 Budget
The Budget Reconciliation and Financing Act of 2025, House Bill 352, rewrote the top of the Maryland rate schedule. Most ranking pages still quote 5.75% as the top rate, which is now wrong for every client we serve.
The New 6.25% and 6.5% Brackets
According to the Maryland 2025 resident tax booklet, joint filers now pay 5.75% on taxable income from $300,000 to $600,000, then 6.25% up to $1.2 million, and 6.5% above that. Single filers reach 6.25% at $500,000 and 6.5% at $1 million. Consequently, a couple with $1.5 million of taxable income pays about $89,322 in state tax alone, before the county adds its share. That figure is the new benchmark for any expat tax Maryland estimate.
The County Income Tax Layer
Every Maryland county and Baltimore City levies a local income tax on the same taxable income. For 2025 and 2026, Montgomery County charges a flat 3.2%, one of the highest rates in the state. Moreover, the county tax has no brackets at the top, so every extra dollar of UK income costs 3.2% on top of the state rate. Together, the top combined rate on ordinary income in Bethesda is 9.7%, and that is the figure to use when you estimate the expat tax Maryland cost of UK rent or pension income.
Montgomery County Moves to 3.3% in 2027
Importantly, the county has already legislated the next rise. Under Montgomery County Council Resolution 20-1121, adopted on 13 May 2026, the county rate becomes progressive from 1 January 2027. It will charge 2.7% on the first $50,000, 3.0% up to $150,000 and 3.3% above that. Therefore wealthy households pay slightly more from 2027, and the top combined rate rises to 9.8%. Any expat tax Maryland plan that spans 2026 and 2027 should reflect that change.
Deductions That High Earners Now Lose
From 2025, Maryland reduces itemised deductions by 7.5% of federal adjusted gross income above $200,000, or $100,000 if married filing separately. As a result, a household with $1.5 million of income loses $97,500 of deductions before it starts, which wipes out most mortgage interest, property tax and charitable deductions. Similarly, the $3,200 personal exemption falls to nil once joint income exceeds $200,000. In short, Maryland now taxes high earners on almost their entire income, which pushes the expat tax Maryland effective rate close to the headline rate.
The 2% Capital Gains Surtax and Your UK Assets
The most expensive 2025 change for British families is the new tax on capital gains. It is also the change that no competitor page explains for UK assets.
How the Surtax Works
Chapter 604 of the Acts of 2025 imposes an additional 2% tax on net capital gain for any filer whose federal adjusted gross income exceeds $350,000. The calculation sits on the new Maryland Form 502CG. Consequently, a UK share gain realised by a Bethesda resident bears 6.5% state tax, 3.2% county tax and a further 2%, which totals 11.7%. Maryland applies no preferential rate to long-term gains, so the surtax sits on top of full income tax rates. For expat tax Maryland purposes, that makes a UK gain the most heavily taxed item on the return.
The Exceptions Rarely Fit British Assets
Form 502CG removes gains from a primary residence, certain US retirement plans, farm livestock, conservation land, section 179 business property and nonprofit affordable housing. However, UK shares, UK funds and a let London flat fit none of these. Therefore almost every UK gain a British family realises after arrival bears the full surtax, and this single rule now drives much of the expat tax Maryland cost of selling British investments.
The $1.5 Million Cliff on a Former London Home
The primary residence exception has a sharp edge. The form excludes gain only where the sale totals less than $1,500,000, and it gives no relief at all above that figure. Consequently, a family that sells its former London home for £1.2 million, about $1.58 million, loses the exception entirely. Any gain left after the federal section 121 exclusion then bears the 2% surtax as well as state and county tax. We model this cliff before every London sale, because a price just below the line can save thousands. Few expat tax Maryland traps are this binary.
The Surtax Threshold Includes UK Income
The $350,000 test uses federal adjusted gross income, which includes UK rent, UK pension drawings and UK gains. Therefore a British retiree with modest US income can cross the threshold in the year they sell a UK portfolio. Planning sales across two tax years, or matching them with losses, can keep income below $350,000. It is one of the few genuine levers in expat tax Maryland planning.
Why Maryland Gives No Credit for UK Tax
This section addresses the heart of the expat tax Maryland problem for British families. Several ranking pages claim that Maryland offers a foreign tax credit. It does not.
The Credit Covers Other States Only
Under Maryland Tax-General section 10-703, a resident may claim a credit for "State tax on income paid to another state". The claim form, Maryland Form 502CR, has no line for a foreign country. Consequently, UK income tax on rent and UK capital gains tax on property earn nothing against your Maryland or county bill. That rule alone explains why the expat tax Maryland cost of UK income is so high.
What the Wynne Case Did and Did Not Change
Maryland is famous for Comptroller v. Wynne, the 2015 Supreme Court case that forced it to credit other states' tax against county tax as well as state tax. However, that decision rested on interstate commerce. It did not extend any credit to tax paid to a foreign country. Therefore a Bethesda family gets full state and county relief for tax paid to New York, but none for tax paid to HMRC. In short, Wynne offers no expat tax Maryland relief for foreign tax.
Why the Federal Credit Does Not Flow Through
Maryland starts from federal adjusted gross income. The foreign tax credit reduces federal tax, not income, so it never reaches the Maryland computation. Similarly, the US-UK income tax treaty binds only the federal government. In other words, the relief that fixes your federal return does nothing in Annapolis or Rockville, and any expat tax Maryland plan that relies on the treaty at state level is built on sand.
No Pension Exclusion for UK Pensions
Maryland offers retirees aged 65 or over a pension exclusion of up to $41,200 for 2025. However, it applies only to plans qualified under sections 401(a), 403 or 457(b) of the Internal Revenue Code, and the booklet states plainly that foreign retirement income does not qualify. Consequently, a SIPP drawing, a UK final salary pension and the UK State Pension are all fully taxable in Maryland. That is a key expat tax Maryland difference from the pages that suggest otherwise.
Maryland Residency: Domicile, Abode and Part-Year
Before any of this applies, Maryland must treat you as a resident. Its rules catch British families earlier than they expect, and they are hard to escape later.
The Two Resident Tests
According to the resident booklet, you are a Maryland resident if your permanent home, your domicile, is in Maryland. Alternatively, you are a resident if you maintain a place of abode in Maryland for more than six months of the year. If you are also physically present for 183 days or more, you must file a full-year resident return. Consequently, a British executive on an L-1 visa who rents in Bethesda for a year is a Maryland resident on worldwide income, whatever their long-term plans. That is where most expat tax Maryland exposure begins.
Domicile Follows You Overseas
The booklet also states that individuals whose domicile is in Maryland but who work outside the state, including overseas, retain their Maryland legal residence. Therefore a family that takes a green card, buys in Chevy Chase and later returns to London must show that it has genuinely made a new permanent home. Otherwise, the expat tax Maryland claim on worldwide income continues. Our guide to keeping or breaking state residency ties when moving to London covers the evidence.
The Arrival and Departure Years
In the year you arrive or leave, you file a part-year resident return. Maryland then taxes worldwide income only for the resident period, using a Maryland income factor to prorate deductions and exemptions. Consequently, the date you move, and the date you realise large UK gains, shape the expat tax Maryland result for that year.
Federal and UK Dates Differ
Federal residency follows the green card test or the IRS substantial presence test, while Britain applies the statutory residence test in RDR3. All three dates can differ, and aligning them is a core part of our work. Our guide to the first-year choice election covers one of the federal levers.
Commuting to DC or Virginia From Bethesda
Bethesda is a commuter town, and many British residents work in the District or across the river. Fortunately, the salary rules here are kind.
Working in the District of Columbia
The District of Columbia does not tax the wages of non-residents who commute in. Accordingly, a Bethesda resident working on K Street or at an international institution pays Maryland and Montgomery County tax on that salary and nothing to DC. This keeps the expat tax Maryland position on salary refreshingly simple. Our guide for high earners in Washington DC covers the District side.
Working in Virginia
Maryland and Virginia have a reciprocal arrangement for wages, so Virginia generally does not tax the salary of a Maryland resident who works in Tysons or Reston. However, other Virginia-source income, such as rent from a McLean property, stays taxable in Virginia. In that case Maryland credits the Virginia tax against both state and county tax.
The Contrast With UK Tax
The contrast is striking. Virginia tax on a McLean rental earns a full Maryland credit, while HMRC tax on a Chelsea rental earns nothing. Hence the same type of income, from a similar flat, receives opposite expat tax Maryland treatment depending on which side of the Atlantic it sits.
How Each Type of UK Income Fares in Maryland
With no credit and no pension exclusion, the outcome depends heavily on the type of income and the size of your total income.
UK Rental Income
Britain taxes UK rent in the hands of a non-resident landlord, usually through the Non-Resident Landlord Scheme, with 20% withheld unless you register to receive rent gross. The federal return credits that UK tax. Maryland and the county, however, add 9.7% with no relief, so UK rent bears three full layers of tax and carries the heaviest expat tax Maryland burden of any regular income. See our guide to stopping the 20% NRL withholding for the cash-flow side.
UK Property and Share Gains
Non-residents pay UK capital gains tax on UK land at 18% and 24%, as HMRC's guidance for non-residents explains, but generally pay nothing on UK shares. Federally, both are taxed, and the 3.8% net investment income tax generally takes no foreign credit. Maryland then charges up to 11.7% on the whole gain. Consequently, UK share gains after arrival bear US and Maryland tax only, while UK property gains bear all four layers. Remember too that the US gives no basis step-up on arrival, so gains built up in Britain are taxed in full. That split should shape the order in which you sell, and it is central to expat tax Maryland planning.
Temporary Non-Residence Can Reopen UK Tax
A family that sells UK shares tax-free in Britain and then returns within five years can face UK tax on those gains after all. Our guide to the UK temporary non-residence rule explains the charge. Therefore a sale that looks clean in the expat tax Maryland model may still carry a British liability if you plan to go home.
UK Pensions, ISAs and Funds
A private UK pension or SIPP drawing is generally taxable only in the United States under Article 17, so Maryland and the county tax it at 9.7% with no UK tax to credit. The UK State Pension is also fully taxable federally, as IRS Publication 915 explains, and our guide to the UK State Pension for Britons in America covers the detail. Government pensions such as the NHS scheme are covered in our guide to NHS, Teachers' and local government pensions. Meanwhile, for expat tax Maryland purposes an ISA has no US status, and UK funds are usually PFICs reported on IRS Form 8621, so their income flows straight into the Maryland base.
Case Study: The Hales in Bethesda
This illustrative case study uses the 2025 Maryland rate schedules, which continue into 2026, and current federal and UK rules. Names and details are fictional, and we use an exchange rate of $1.32 to the pound.
The Facts
Edward and Charlotte Hale, both British nationals, moved from Richmond upon Thames to Bethesda on green cards in early 2024. Edward earns $1,100,000 as a partner at a Washington firm. Charlotte draws £30,000 ($39,600) a year from her SIPP. They let their London flat for a net profit of £50,000 ($66,000). In 2026, they also sell a UK share portfolio held in a general investment account, realising a gain of £300,000 ($396,000).
The Maryland and County Bill
Their federal adjusted gross income is $1,601,600. The 7.5% phase-out cuts their $120,000 of itemised deductions to $14,880, so Maryland taxable income is $1,586,720. State tax is $94,959, Montgomery County tax is $50,775, and the 2% surtax on the gain adds $7,920. The total is $153,654. Without their UK income, the same household would pay $93,811. Consequently, their British income adds $59,843 to the expat tax Maryland bill, and not one dollar of UK tax reduces it.
The UK and Federal Position
HMRC taxes the rent at about £7,486 ($9,882) after Charlotte's personal allowance, and the federal return credits it in full. The SIPP drawing is taxable only in the United States. HMRC does not tax the share gain, so federal tax of $79,200 at 20% and net investment income tax of $15,048 apply with no credit. Together with the Maryland cost of the gain, about $49,115, the Hales pay roughly $143,363 of US tax on a gain that was mostly built up in Britain.
What Timing Would Have Changed
Had the Hales sold the portfolio in early 2024, before leaving Britain, HMRC would have charged 20% after the £3,000 annual exempt amount, which is £59,400 ($78,408). Selling after arrival instead cost about $64,955 more. By comparison, a family living across the river in McLean would have paid Virginia about $22,770 on the same gain, roughly $26,345 less than Maryland. The lesson is that pre-arrival disposals, and even the choice between Bethesda and McLean, must be modelled before you move. Additionally, from 2027 the new county brackets add about $987 a year to the Hales' bill.
Compliance That Comes With Maryland Residency
Becoming a Maryland resident usually means becoming a US tax resident, which brings reporting obligations many British arrivals miss.
FBAR and Form 8938
As US tax residents, you must report UK bank, ISA, pension and investment accounts on the FBAR once their combined value exceeds $10,000 at any time in the year, through FinCEN's BSA E-Filing system. Additionally, Form 8938 applies above higher thresholds. A missed FBAR carries serious penalties, and our FBAR and FATCA reporting service handles both alongside your returns.
Maryland Deadlines and Estimated Tax
Maryland returns are due on 15 April. You can extend the time to file, but not the time to pay, so any balance should go with an extension request on Form PV by the deadline. Accordingly, a spring sale of UK assets should trigger an expat tax Maryland estimated payment covering both the state and county share, rather than interest the following year.
Missed Maryland Returns
Some families file federally but overlook Maryland in the arrival year, often because a relocation package handled payroll but not the expat tax Maryland return itself. Others file Maryland but leave the UK rent off entirely, assuming the treaty covers it. If you are behind on federal filings as well, our IRS Streamlined filing service can bring the federal side up to date, and we prepare the matching Maryland returns in the same engagement.
How TaxYork Can Help
Our team prepares the full set of returns a British family in Maryland needs, and we build every expat tax Maryland engagement around all four layers together.
Joined-Up Returns
We prepare your federal return with Form 1116 and the treaty positions, your Maryland Form 502 with Forms 502CG and 502CR, and your UK Self Assessment. Consequently, the same figures, exchange rates and dates run through every return, which is what a sound expat tax Maryland filing requires. Where HMRC has deducted UK tax from a pension in error, our tax treaty optimisation team reclaims it.
Planning Before the Event
We model UK disposals, pension drawings and residency dates before you act, because timing is the main lever against the missing credit and the new surtax. Furthermore, we test the $350,000 surtax threshold and the $1.5 million residence cliff before any sale. For wider matters, see our cross-border planning service.
Conclusion
The expat tax Maryland position became markedly more expensive in 2025. Maryland now taxes high earners at up to 6.5%, adds a county tax of 3.2% in Montgomery County, rising to 3.3% from 2027, and charges a further 2% on capital gains once income passes $350,000. Moreover, it gives no credit for UK tax and no pension exclusion for UK pensions. Therefore British families in Bethesda fare best when they understand the domicile rules, sell UK assets before arrival where possible, watch the surtax threshold and the $1.5 million cliff, and keep their FBAR and Form 8938 filings current.
Contact Us
If you live in Bethesda, Chevy Chase, Potomac or elsewhere in Maryland and hold British income, property or pensions, we can prepare your federal, Maryland and UK returns together. Book a consultation with our team, email hello@taxyork.com or call 020 3488 8606. You can also estimate your position first with our US-UK tax calculators.
Disclaimer
This article provides general information about US federal, Maryland, Montgomery County and UK tax rules as they stood in September 2026. It is not tax or legal advice for your specific circumstances, and the case study is illustrative only. Tax rules, rates and thresholds change, and the outcome for your family depends on your full facts. Please take professional advice before acting. TaxYork provides US and UK tax return preparation and compliance services; contact us for help applying these rules to your own situation.