I live in PA and work in MD. Which state should tax my employer's contributions to the MSRPS (Maryland State Retirement Pension System)?

[David_Gri]

I live in Pennsylvania and work in Maryland. In past years, I have only filed a Pennsylvania return (not Maryland) because the two states have a reciprocal agreement. (Per FreeTaxUSA, "If you were a resident of [Pennsylvania] for the whole year and your only Maryland income is from wages, then you aren't required to file a Maryland state tax return.")

On the W-2 that I receive from my Maryland employer, my contributions to the MSRPS (Maryland State Retirement Pension System) are listed in box 14 as "STPICKUP." The STPICKUP amount is included in the value of box 16 (state wages), but not included in the value of box 1 (federal wages). My questions follow:

1. Contrary to what I've done in the past, should I actually be filing a Maryland return?
   (My concern is that the STPICKUP contributions to MSRPS actually count as "income that is not from wages," which would affect my eligibility to skip the Maryland return.)
   
   
2. Should the STPICKUP contributions to MSRPS be taxed by Maryland or Pennsylvania?
   (In the past, they've always been taxed by Pennsylvania because my employer includes them in the value of my state wages in box 16, which I use on my Pennsylvania return.)
   
   
3. If it turns out that I've been filing wrong for the past ten years, do I need to amend all of my old returns?
   (I really hope not. I filed my past returns in good faith, according to my best understanding of the complicated tax rules between Maryland and Pennsylvania.)
   

Here's some relevant information that I've found:

• The instructions for the Maryland non-resident tax return say, "Nonresidents must report [the STPICKUP] amount on the Maryland Form 505 [the Maryland non-resident tax return], line 19, 'other' using code letter 'g'.” Code 'g' is described, “Pickup contributions of a Maryland State retirement or pension system member. . . . See Administrative Release 21."
  Source: https://www.marylandtaxes.gov/individual/income/forms/2024-Income-Tax-Forms.php
• The aforementioned "Administrative Release 21" says, "Payment of federal taxes on the pickup amount is deferred until the employee actually begins receiving benefits or otherwise recovers the contributions. For all other purposes, however, the pickup program does not 'reduce' the employee’s income. . . . It also does not reduce the employee’s income for state tax purposes. When calculating Maryland adjusted gross income, the employee is required to add back the pickup amount."
  Source: https://www.marylandtaxes.gov/pros/admin-releases/index.php
• FreeTaxUSA says, "This part of your wages is nontaxable for federal purposes until distributed to you, but it is taxable by the state of Maryland immediately. For more information, see Administrative Release 21." Unfortunately, it doesn't add any clarity for people like me who are non-residents of Maryland.
  Source: https://www.freetaxusa.com/answers?faq=226

[DianeW777 · Accepted solution]

Your returns have been completed correctly because the STPICKUP contributions to MSRPS are part of your wages and not a separate income. You are not required to file a nonresident Maryland (MD) tax return. There is nothing to amend.

For Pennsylvania (PA), your state wages in box 16 are accurately reflected because PA does not allow a deduction for any type of retirement account. When you retire PA does not tax your retirement at that time.

Special instructions for residents of the following states: The District of Columbia, Pennsylvania or Virginia:

 If you did not maintain a place of abode in Maryland for more than six months (183 days or more) of 2024, you are exempt from Maryland tax on your Maryland wage and salary income. Enter all wage and salary income in the Non-Maryland Income column of Form 505, even if you earned the income from services performed in Maryland. The last sentence applies to income other than wages if it was derived from MD sources.

• MD Nonresident Instructions