Direct Indexing in Maryland: Montgomery County Investors, the 35.5% Combined Rate, and the $5M Estate Tax Gap

Maryland's 2026 capital gains rate stacks four layers: federal (23.8%), state (up to 6.5% under the new 2026 brackets), county (3.2% in Montgomery County), and a new 2% capital gains surtax for investors with federal AGI above $350,000. For top-bracket investors in Bethesda, Chevy Chase, Potomac, and Rockville, that totals 35.5% — higher than New Jersey (34.55%), Minnesota (33.65%), Connecticut (30.79%), and Illinois (28.75%), and in the same tier as Oregon at its highest. No Maryland municipality levies a separate city income tax beyond the county layer. For Lockheed Martin and Marriott International executives headquartered in Bethesda, T. Rowe Price and Legg Mason finance professionals in Baltimore, NIH-adjacent biotech employees at Emergent BioSolutions, AstraZeneca/MedImmune, and Novavax in the I-270 corridor, and the dense concentration of federal contractors, consultants, and senior government officials living in Montgomery and Howard counties, direct indexing at the 35.5% combined rate generates $6,000–$30,000+ per year in after-fee tax savings at $2M–$5M in taxable assets. The planning picture is complicated by Maryland's $5M state estate tax exemption — far below the federal $15M threshold under OBBBA — and a separate inheritance tax that stacks on top of it.

Maryland's capital gains rate in 2026: the four-layer structure

Maryland taxes capital gains at the same graduated rates as ordinary income — there is no preferential state rate for long-term capital gains.¹ Both short-term and long-term gains are subject to the same Maryland income tax brackets. This is the same structure as California, New Jersey, Oregon, and Minnesota.

But Maryland's rate has a structural feature no other state replicates: a four-layer stack. State income tax, county income tax, federal rates, and now a capital-gains-specific surtax all apply simultaneously for high-income investors:

Even at the lowest high-income bracket — $350K–$500K in AGI where the surtax kicks in — the combined Maryland rate is 34.75%, higher than Minnesota's 33.65% top rate. At $500K–$1M, it rises to 35.25%. Maryland's combination of the new brackets, the county tax, and the surtax makes it one of the highest-rate states for capital gains in the country.

The 2% Maryland capital gains surtax: what it is and when it applies

Maryland enacted a 2% surtax on net capital gains as part of the FY2026 Budget Reconciliation and Financing Act (HB 352), effective for tax years beginning after December 31, 2024.² Several features distinguish this surtax from the regular income tax:

• AGI-based trigger, not income-based. The surtax activates when federal adjusted gross income exceeds $350,000 — a lower and more broadly applicable threshold than the new 6.5% income tax bracket ($1M). Most senior professionals, dual-income DC-suburb households, and investors with K-1 distributions, RSU vesting, or consulting income will qualify.
• No filing-status adjustment. The $350,000 threshold is the same for single filers, married filing jointly, and all other statuses. This is unusual — most tax thresholds are lower for single filers. Dual-income Maryland couples hit the threshold at $350K combined AGI, not a higher MFJ-specific amount.
• Applies specifically to capital gains. Unlike the regular income tax, this surtax applies only to net capital gain — not wages, interest, or business income. For an investor with a $500K salary and $200K in realized capital gains, the surtax applies to the $200K in capital gains (since total AGI is $700K, above $350K).
• Surtax exemptions — the following are excluded:
  — Gains from the sale of a primary residence (verify threshold with a Maryland CPA)
  — Gains from assets held in retirement accounts (IRA, 401(k), Roth IRA)
  — Gains from defined contribution and deferred compensation plans
  — Gains from property whose cost is deductible under IRC §179

For direct indexing clients, none of the surtax exemptions apply to taxable-account equity positions — the core DI portfolio. RSU-related LTCG, capital gains from ETF-to-DI transitions, concentrated stock sale proceeds, and K-1 capital gain distributions are all subject to the 2% surtax for investors above the $350K AGI threshold. Every dollar of tax-loss harvesting in the DI portfolio saves at the full 34.75%–35.5% combined rate.

Maryland income tax brackets for 2026

The FY2026 Budget Act added two new top brackets to Maryland's graduated income tax structure, with the new rates effective for tax years beginning after December 31, 2024. The existing 5.75% rate became the third tier rather than the top rate:²

Source: Maryland FY2026 Budget Reconciliation and Financing Act (HB 352). Prior top rate was 5.75%; new 6.25% and 6.5% brackets effective for tax years beginning after December 31, 2024.

For most Bethesda-area executives and senior professionals — Lockheed Martin VPs, Marriott senior directors, T. Rowe Price portfolio managers — annual income including RSU vesting commonly exceeds $600K MFJ, placing capital gains in the new 6.25% bracket. Senior executives and managing directors with equity, K-1, and bonus income above $1.2M MFJ reach the 6.5% top bracket. Add 3.2% county + 2% surtax to the new 6.25% or 6.5% state rate, and every realized gain is subject to a substantially higher effective rate than most Maryland investors expected before 2025.

Maryland county income tax: the layer that matters most for comparisons

Every Maryland resident pays a local income tax to their county (or Baltimore City) in addition to the state income tax. Unlike New York City's separate city tax, Maryland's county tax is collected alongside the state return — a single filing, combined payment.³

The county tax is what makes Maryland's combined rate significantly higher than states like Connecticut (no local income tax) or Illinois (no Chicago income tax on state return). A Montgomery County resident pays 3.2% on every dollar of capital gain — on top of the state rate and the new surtax — creating the 35.5% total. An investor in Connecticut or Illinois faces only state + federal, explaining the gap between Maryland's rate and those states' combined rates.

Break-even table: Maryland vs. other states

The following table shows estimated annual net benefit of direct indexing at a 1.5% annual harvest rate against a 0.25% fee premium over a low-cost ETF. The Maryland column uses 35.5% (top-bracket Montgomery County: 6.5% + 3.2% + 2% surtax + 23.8% federal). These are approximations — actual harvest rates vary with market conditions.

Assumes 1.5%/year harvest rate, 0.25% DI fee premium over low-cost ETF alternative. MD column uses 35.5% combined rate (6.5% MD state + 3.2% Montgomery County + 2% surtax + 23.8% federal LTCG + NIIT). NJ uses 34.55% (10.75% NJ + 23.8% federal). MN uses 33.65% (9.85% MN + 23.8% federal). TX/FL uses 23.8% federal only. Actual harvest rates vary significantly with market conditions and portfolio composition. These are estimates, not guarantees.

The break-even point at the 35.5% Maryland rate is approximately $235,000 in taxable assets — one of the lowest in the country. At $2M, Maryland investors net $5,650 annually after fees, versus $7,140 the same investor would net in Texas. Direct indexing generates 49% more per harvested dollar in Maryland (35.5%) than in no-income-tax states (23.8%).

Maryland's professional ecosystem: who faces the 35.5% rate

Defense and aerospace: Lockheed Martin in Bethesda

Lockheed Martin (headquartered in Bethesda, MD) is the largest defense contractor in the world and one of the largest S&P 500 companies by market capitalization. Senior Lockheed executives receive substantial RSU grants — program managers, vice presidents, and C-suite officers routinely hold vesting schedules that generate hundreds of thousands of dollars in annual equity income. At Maryland's 35.5% combined rate, a Lockheed executive with a $1.5M DI portfolio generating $22,500/year in harvested losses saves approximately $7,988/year — nearly $8,000 per year of additional after-tax wealth, after the DI fee premium.

The employer-stock wash-sale rule is the key configuration requirement for Lockheed employees: any direct-indexed portfolio holding LMT stock while the executive is simultaneously vesting Lockheed RSUs creates a wash-sale trap that permanently disallows harvested losses on LMT-correlated positions. Parametric, Aperio, and Vanguard Personalized Indexing all support employer-stock exclusion screens. See the RSU holder guide for the mechanics.

Hospitality and consumer: Marriott International in Bethesda

Marriott International (headquartered in Bethesda) operates one of the largest hotel chains in the world and runs a substantial executive equity compensation program. Senior Marriott leaders receive RSU grants and NQSOs on multi-year vesting schedules — creating annual income events at ordinary income rates (for NQSOs) and LTCG on subsequent appreciation (for shares held post-vesting). At Maryland's 35.5% combined rate, the LTCG on Marriott share appreciation is significantly more expensive than in Virginia (where many DC-area executives have relocated), making the DI loss bank valuable for Bethesda-based Marriott employees who remain Maryland residents. The employer-stock exclusion screen is required for Marriott RSU holders in the same way as Lockheed employees. See the NQSO guide for the tax mechanics on NQSO exercises.

Financial services: T. Rowe Price and Baltimore finance

T. Rowe Price (headquartered in Baltimore) is one of the largest independent asset managers in the United States, managing approximately $1.5 trillion in assets under management. Senior T. Rowe Price portfolio managers, analysts, and executives receive equity compensation in T. Rowe Price stock (TROW) — a publicly traded position with substantial embedded gains for long-tenured employees. Baltimore City residents face the same 3.2% city income tax as Montgomery County, bringing the combined rate to 35.5% at the top Maryland bracket.

Franklin Templeton (formerly Legg Mason) acquired its Baltimore predecessor and operates a significant Baltimore-area workforce. The Legg Mason acquisition created a forced liquidity event for long-tenured Legg employees who held appreciated Legg stock — a scenario where having an existing DI loss bank would have offset the acquisition-driven capital gains at the 35.5% Maryland rate. For current T. Rowe Price employees, pre-positioning a loss bank before planned TROW diversification makes the same tax math work prospectively.

Biopharmaceuticals: the I-270 corridor

The Maryland I-270 technology corridor — from Rockville through Gaithersburg and Frederick — is one of the densest concentrations of biopharmaceutical, biotech, and government health agency activity in the country. Key employers whose senior employees face Maryland's 35.5% rate include:

• AstraZeneca / MedImmune (Gaithersburg) — MedImmune, AstraZeneca's biologics subsidiary, is headquartered in Gaithersburg; its senior scientists and executives receive AstraZeneca equity comp (AZN ADR shares) subject to complex UK-US dual-jurisdiction considerations and, for Maryland-resident employees, the 35.5% Maryland rate on ultimate share dispositions.
• Emergent BioSolutions (Gaithersburg) — publicly traded; senior employees received RSU grants during and after the company's high-profile pandemic contracts, creating embedded gains now subject to Maryland's full rate structure.
• Novavax (Gaithersburg) — biotech equity comp with significant stock volatility, creating both gain and loss events suitable for DI coordination.
• QIAGEN / NIH-adjacent CROs — the cluster of contract research organizations and biotech services firms surrounding the National Institutes of Health campus in Bethesda and Rockville employs thousands of life-science professionals at compensation levels that regularly exceed the $350K AGI surtax threshold.

For biotech employees with ISO grants — a common structure in venture-backed and mid-stage biotech companies in the I-270 corridor — the Maryland combined rate applies to qualifying-disposition LTCG at 35.5%, while the AMT at exercise is governed by federal law. Direct indexing provides a loss bank that can offset the LTCG on qualifying ISO dispositions. See the ISO and AMT guide for the mechanics.

Federal contractors and consultants in Montgomery and Howard counties

The DC-Maryland-Virginia metro area is home to hundreds of thousands of federal government contractors and consulting professionals. Maryland's Montgomery and Howard counties — close to NSA, NIH, NIST, FDA, and other major agencies — house large numbers of senior consultants at SAIC, Booz Allen Hamilton (with significant Maryland operations), Leidos, Maximus, CACI International, and similar firms. Senior partners, managing directors, and equity-holding employees at these firms regularly exceed the $350K AGI surtax threshold through base salary, bonus, and equity events. For these professionals, the Maryland DI opportunity is structurally identical to the defense executive scenario: RSU vesting funds the DI account, the employer-stock exclusion screen prevents wash-sale violations, and the 35.5% combined rate makes each harvested dollar 49% more valuable than in no-income-tax states.

Maryland estate tax: the $5M state / $15M federal gap

Maryland imposes a state estate tax with a $5,000,000 per-person exemption — far below the federal $15,000,000 exemption raised permanently under OBBBA (July 2025).⁴ This gap creates substantial planning exposure for Maryland investors who have accumulated more than $5M in assets but remain below the federal threshold.

Critical points about the Maryland estate tax:

• Graduated rates 7%–16%. Maryland estate tax is graduated, reaching a top marginal rate of 16% on estates well above the $5M exemption. A $7M Maryland estate (no planning) could owe substantial Maryland estate tax on the $2M excess despite owing zero federal estate tax.
• Limited portability. Unlike the federal estate tax, Maryland's $5M exemption is not fully portable between spouses in the same way. Married Maryland couples must use credit shelter trust planning at the first death to preserve both spouses' individual $5M exemptions. Without planning, the first-to-die's exemption shelters the first $5M, but the surviving spouse inherits the full estate with only their own $5M exemption remaining — exposing assets above $5M to Maryland estate tax at the survivor's death.
• Inheritance tax stacks on top. Maryland is one of very few states with both an estate tax and a separate inheritance tax. The Maryland inheritance tax imposes a 10% levy on assets passing to non-exempt beneficiaries (including nieces, nephews, and unrelated individuals), on top of the estate tax already assessed on the estate itself. Spouses, children, and parents are exempt from the inheritance tax; siblings and more distant relations are not.
• Reachable by Maryland professional couples. A dual-income Montgomery County couple — a Lockheed director and a NIH-senior-scientist spouse — with a $2.5M home, $3M in retirement accounts, and $2M in direct-indexed taxable assets has a $7.5M combined estate. That couple faces zero federal estate tax under OBBBA's $15M exemption, but significant Maryland estate tax exposure above the $5M threshold without credit shelter trust planning.

How this interacts with direct indexing strategy

The standard DI estate approach — harvest losses during life, let unrealized gains accumulate, defer recognition until death when §1014 resets cost basis — works effectively in Maryland for the capital gains component. Federal law resets cost basis to date-of-death fair market value, and Maryland does not impose a separate state capital gains tax at death. The §1014 step-up eliminates embedded capital gains in the DI portfolio for heirs without Maryland taxation.

However, growing the DI portfolio's market value accelerates a tension: larger values push the estate further above Maryland's $5M threshold, increasing Maryland estate tax exposure at 13%–16%. For Maryland investors whose estates already exceed $5M, coordinating the DI strategy with a credit shelter trust structure — allocating the taxable DI account between spouses to use both exemptions, or directing it into a bypass trust at the first death — becomes an integrated planning task that a DI specialist handles alongside the tax-loss harvesting strategy.

See the direct indexing and estate planning guide for the full §1014 step-up mechanics, DAF gifting from appreciated DI lots, and how OBBBA's federal exemption interacts with state-level estate taxes like Maryland's.

QSBS in Maryland

Maryland uses rolling federal conformity for income tax purposes, which means it generally conforms to the federal qualified small business stock (§1202) exclusion.⁵ Under OBBBA (July 2025), qualifying QSBS held for at least five years benefits from a 100% federal exclusion up to $15M per issuer. Maryland founders and angel investors who qualify for the federal exclusion generally also owe no Maryland income tax on those excluded gains.

This is a meaningful contrast to California (which does not conform to §1202 and taxes the full QSBS gain at 13.3%) and a significant advantage over the taxes Maryland imposes on ordinary capital gains. I-270 corridor biotech founders, software company founders in the Bethesda/Rockville area, and angel investors in Maryland-based startups have historically achieved near-zero combined tax on qualifying QSBS exits due to Maryland's §1202 conformity.

For founders with partial QSBS eligibility — mixed QSBS/non-QSBS tranches, earnout income taxable as ordinary income, or gains above the $15M cap — direct indexing can offset the taxable portion at the 35.5% Maryland rate. Verify current Maryland conformity with a Maryland CPA for your specific tax year and gain structure.

Platform selection for Maryland investors

All major direct indexing platforms serve Maryland investors through advisor networks or directly. Key considerations at 35.5%:

• Parametric Portfolio Associates and BlackRock Aperio ($250K–$1M+ minimums, advisor-only) are the appropriate platforms for Maryland investors with multi-account coordination requirements: Lockheed and Marriott executives with both RSU and NQSO vesting schedules, biotech executives with concurrent ISO and RSU grants, and PE professionals managing K-1 income events. Parametric's cross-account wash-sale monitoring is essential for any Maryland executive simultaneously holding employer stock in their DI account and continuing RSU or NQSO vesting. See the Parametric review and Aperio review.
• Vanguard Personalized Indexing (~$250K minimum, 0.20% fee) and JPMorgan Tax-Smart Direct Index Strategies ($250K minimum, 0.23%) are strong advisor-platform options for Maryland investors who want institutional-grade TLH without the Aperio $1M minimum. The break-even math at 35.5% is compelling for both platforms from $500K+ in taxable assets.
• Canvas by Franklin Templeton ($100K minimum, ~0.15% fee) is the lowest-cost advisor-tier entry for Maryland investors building their first DI account with $250K–$500K. Given Franklin Templeton's existing Baltimore footprint (former Legg Mason operations), Canvas may be familiar to some Baltimore finance professionals through existing advisor relationships.
• Schwab Personalized Indexing ($100K minimum, 0.40% fee) and Wealthfront ($100K minimum, 0.25%) are self-directed options for Maryland investors without complex equity comp situations. Their wash-sale monitoring is limited to their own platforms — a critical limitation for executives with employer stock held elsewhere. See the Schwab review and Wealthfront review.
• Frec ($20K minimum, 0.09% fee) offers the most accessible entry point. At 35.5%, the break-even is well under $100K in taxable assets — making Frec practical for younger Maryland professionals building the DI habit earlier in their careers. Cross-account wash-sale limitations apply. See the Frec review.

Sources

1. Maryland Comptroller — Individual Income Tax. Maryland imposes a graduated income tax on all taxable income including capital gains. Long-term capital gains are taxed at the same rates as ordinary income — Maryland does not provide a preferential rate for capital gains based on holding period. State income tax stacks with the county (or Baltimore City) income tax, creating an effective combined state+local rate in Montgomery County of up to 9.7% (6.5% state + 3.2% county) before the capital gains surtax. Maryland Comptroller official rate tables and tax alerts verified for tax year 2026.
2. Citrin Cooperman — Sweeping Maryland Tax Changes Enacted in FY 2026 Budget Bill. Maryland FY2026 Budget Reconciliation and Financing Act (HB 352) enacted new income tax brackets of 6.25% (income $500K–$1M single / $600K–$1.2M MFJ) and 6.5% (above $1M single / above $1.2M MFJ), effective for tax years beginning after December 31, 2024. Separate 2% capital gains surtax enacted for taxpayers with federal AGI exceeding $350,000, regardless of filing status, applying to net capital gains. Exemptions: primary residence sale (verify threshold), retirement accounts, defined contribution and deferred compensation plans, §179 property. County income tax cap raised to 3.3%.
3. Grant Thornton — Maryland Enacts Major Tax Hikes. Maryland county income taxes (local income tax rates) range from 2.25% to 3.2% across all Maryland counties and Baltimore City. Montgomery County, Prince George's County, Howard County, and Baltimore City each assess 3.2% on all Maryland taxable income including capital gains. County income tax is collected alongside the Maryland state income tax return. All capital gains are subject to county income tax at the same rate as ordinary income — no county-level preferential capital gains treatment exists.
4. SmartAsset — Maryland Estate Tax 2026. Maryland estate tax exemption: $5,000,000 per person. Maryland estate tax rates are graduated, with a top marginal rate of 16% on large taxable estates. Maryland is one of the few states with both a state estate tax and a separate inheritance tax (10% on non-exempt beneficiaries, not applicable to spouses, children, or parents). Maryland's $5M exemption is substantially below the federal $15M exemption (OBBBA, effective July 2025). Maryland estates between $5M and $15M owe Maryland estate tax but no federal estate tax. The Maryland exemption has limited portability compared to the federal portability election — credit shelter trust planning is typically required for married couples. Federal estate tax values per OBBBA July 2025 making the $15M exemption permanent.
5. IRC § 1202 — Partial Exclusion for Gain from Certain Small Business Stock. OBBBA (July 2025) made the 100% federal exclusion permanent and raised the per-issuer gain cap to $15M, with tiered exclusion percentages (50%/75%/100%) at 3/4/5-year holding periods, $75M gross-assets test at issuance. Maryland uses rolling federal income tax conformity and generally conforms to the §1202 exclusion, unlike California which explicitly decouples. Verify current Maryland §1202 conformity with a Maryland-licensed CPA for your specific tax year and gain structure, as state conformity can change with legislative sessions.
6. IRS Rev. Proc. 2025-32 — 2026 Inflation Adjustments. Federal LTCG thresholds for 2026: 20% rate at taxable income above $545,500 (single) / $613,700 (MFJ). NIIT: 3.8% at MAGI above $200,000 (single) / $250,000 (MFJ) — not inflation-adjusted. Federal estate tax exemption: $15,000,000 per person (OBBBA permanent, effective July 2025). Gift annual exclusion: $19,000 per recipient for 2026.

Maryland income tax brackets and capital gains surtax per FY2026 Budget Reconciliation and Financing Act (HB 352), effective for tax years beginning after December 31, 2024. New 6.25% and 6.5% brackets verified via Citrin Cooperman and Grant Thornton tax alerts. Maryland 2% capital gains surtax (federal AGI > $350,000) verified same sources; surtax exemptions should be confirmed with a Maryland CPA for your specific transaction type. County income tax rates per Maryland Comptroller. Federal LTCG thresholds per IRS Rev. Proc. 2025-32. OBBBA estate/QSBS provisions reflect federal law enacted July 2025. Harvest rate estimates (1.5%/year) are industry-average approximations; actual rates vary with market conditions and portfolio composition. This page is informational only and does not constitute financial, tax, or legal advice. Consult a CPA or tax attorney for your specific situation.