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Revamp of Michigan Individual Income Tax Landscape

In 2011, Governor Rick Snyder signed into law Public Acts 38 and 39 of 2011 (the “Act”), which make sweeping changes to Michigan’s business and individual tax landscape.

Relevant to individuals, the Act makes many changes, including taxing income from pensions and other types of retirement plans.  This article summarizes the changes applicable to individuals.

Retirement Income

Under prior law, Michigan retirees were not taxed on: (i) income received from public pensions and retirement plans, and (ii) a portion of the income received from private retirement plans and pensions ($45,120 for single filers; $90,240 for joint filers). That will change effective January 1, 2012, as follows.

  • Persons Born Before 1946. The Act does not change such persons' current treatment of retirement or pension income. Public pensions and other sources of public retirement income (including social security benefits) will continue to be exempt from state income tax. Likewise, the current exemption applicable to private pension and other sources of private retirement income will continue ($45,120 for single filers; $90,240 for joint filers).
  • Persons Born During 1946 through 1952. Such persons' deductions for: (i) public pension and retirement benefits, and (ii) private pension and retirement benefits, are limited to $20,000 for single returns ($40,000 for joint returns).  Once such persons reach age 67, the deductions are available against all income. However, if such persons' total household resources exceed $75,000 ($150,000 for a joint return), no deductions are available. The deduction for social security benefits remains available.
  • Persons Born After 1952. Such persons' deductions for: (i) public pension and retirement benefits, and (ii) private pension and retirement benefits, are no longer available.  However, the deduction for social security benefits remains available. When such persons reach age 67, they are eligible for a deduction of $20,000 ($40,000 for joint returns) against all types of income, although the separate deductions for social security benefits and the standard deduction are not allowed to persons who take the deduction. If household resources exceed $75,000 ($150,000 for a joint return), no deduction is available.

Individual Income Tax Rate

Beginning January 1, 2013, the individual income tax rate will be lowered to 4.25% (from 4.35%).

Homestead Property Tax Credit (the “HPTC”)

The HPTC offsets the cost of property taxes for certain taxpayers.  The Act makes a variety of changes to the HPTC.

  • Credit Unavailable to Certain Taxpayers. The Act eliminates the HPTC for taxpayers whose taxable value of their homestead exceeds $135,000.  For a new home, this limit equates to a sale value of $270,000.
  • Phase-Out. The HPTC will be phased-out starting at total household resources of $41,000 and will be eliminated once total household resources reach $50,000. Under current law, the HPTC phase-out does not begin until household income exceeds $73,600.

Deductions for Interest and Dividends

Effective January 1, 2012, taxpayers born after 1945 will no long be able to deduct a portion of their interest, dividend, and capital gains income.  Under current law, the deduction is limited by a dollar amount only.

Standard Personal Exemption Phase-Out

The standard personal exemption will be phased-out for single taxpayers with household resources between $75,000 and $100,000, and for married couples filing joint returns with household resources between $150,000 and $200,000.

Earned Income Tax Credit

For tax years after 2011, the Michigan Earned Income Tax Credit will be reduced from 20% to 6% of the Federal Earned Income Tax Credit.

Credits

The Act eliminates most credits available under the individual income tax.  For example, the Act eliminates all nonrefundable credits, including credits for city income taxes paid, donations to public entities, donated vehicles, food bank contributions, and college tuition and fees.

Withholding

Persons disbursing pension or retirement income must withhold income tax. Pass-through entities will be required to collect withholding on the distributive shares of members' business income.

Note

Please see our subsequent blog post discussing the unconstitutionality of tying the eligibility of exemptions and deductions to household resources.

Please contact me if you have questions regarding Michigan's individual income tax. 

Categories: Income Tax

Photo of Nicholas M. Oertel
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focuses his practice in the areas of Michigan non-property tax disputes, business entity selection, corporate transactions, and information technology.

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