Restructuring of Michigan Tax Laws

The Michigan Tax Changes took effect on January 1, 2012. The legislation on the state tax reform was signed by Governor Rick Snyder on May 25, 2011. It is the largest Michigan tax revamp in almost 2 decades that funds the eradication of the Michigan Business Tax with a number of restructuring to the individual income tax. Snyder claims that the MBT had to be eliminated because it abolished jobs in Michigan. A 6% tax on the earnings of 40,000 firms doing business in the state that file a federal corporate income tax form will replace MBT.

Here is the list of the changes that were made with the taxes in the state of Michigan:

ON RETIREMENT BENEFITS/PENSION:

Essential income tax restructuring is effective for 2012 tax year. There is no alteration in 2012 in the tax processing of retirement and pension benefits for tax payers who were born prior to 1946. Beneficiaries who were born during the year 1946 until 1952 are entitled to retirement benefits and deduct pension up to $20,000 for single tax payers or married couples that are filing separately or $40,000 if married couples are filing a joint tax return. Beneficiary born after 1952 may not deduct retirement benefits and pension on Michigan Income Tax return. What determines the age category for joint filers is the age of the older spouse.

On Pension Withholding

Withholding is mandatory on pension benefits that are taxable. Pension administrators should adhere to directions from beneficiaries on any MI W-4P obtained. If you accepted a MI W-4P from a beneficiary who has checked box 3, calculate the tax amount withheld by utilizing the direct percentage computation. The withholding rate is 4.35% of any pension or retirement benefit that is taxable. The taxable part is determined by deducting any personal exemption allowance and any pension deduction. If there is no MI W-4P, the pension administrators have these options: First, they should not withhold on the benefits that are given to the beneficiaries that were born prior to 1946 unless the benefits is greater than private pension limitations. And second, if the beneficiary was born in 1946 onwards, the admin should withhold all pension distributions that are taxable at 4.35% Monthly deduction amounts that are non-taxable are: For single recipient pension deduction, the amount is $1,666.67, for married recipient pension deduction, the amount is $3,333.33 and for personal exemption allowance, the amount is $308.33.

ON CORPORATE INCOME TAX

Corporate Income Tax or CIT that was approved May 25, 2011 replaces the Michigan Business Tax, except for those firms that want to maintain certificate credits. Here are the details of CIT.

The Corporate Income Tax consists of 3 different taxes, the corporate income tax, franchise tax on financial institutions and premium tax on insurance firms. The CIT is applicable only to C corporations and units that are taxed as C corporations for federal income tax purposes. The CIT is not applicable to flow through entities and individuals, partnerships, trusts and S corporations although withholding might be allowed with flow through entities.

CIT will be applicable to tax payer that is connected to the state and has physical presence in MI for over a day during the tax year, or if the tax payer collects sales in MI and has MI gross receipts of over $350,000, or the tax payer has beneficial interest or possession in a flow through entity that has nexus with the state of Michigan.

Corporate Income Tax is equivalent to 6 percent of the CIT tax base after allotment or allocation. The CIT tax base of a tax payer whose business actions are subject to tax within the state is allocated to MI utilizing a 100 percent sales factor. Small business alternative credit is the one thing that is available under Corporate Income Tax.

ON HICA (Health Insurance Claims Assessment) ACT

Along with the other Michigan tax law restructuring, is the HICA act wherein health insurance carriers, third party administrators, and self ensured units are obligated to pay an assessment on particular health care claims. All imbursement under the health insurance claims assessment act will be forwarded to the Michigan Department of treasury by EFT or Electronic Funds Transfer. Payments will be made quarterly starting on April 30th, July 30th, October 30th and January 30th. One must accomplish and submit the Form 4926 so that you can be registered to make payments electronically through EFT. The processing of Electronic Funds Transfer Application under Health Insurance Claims Assessment to treasury may take 4 weeks. An annual return is needed to be submitted utilizing an online boundary to e-file straight to Treasury.

SUMMARY OF THE TAX CHANGES

On Tax Rate

The decrease in tax rate from 4.35 percent – 4.25 percent was postponed until the first of October 2012. 4.33 percent is the 2012 annualized yield and it is applicable to all of 2012 not considering when the earning was collected. On 2013 onwards, the tax rate will be 4.25 percent.

On Deductions

Miscellaneous deductions like charity games, political aid or donations, charitable offerings from retirement plans or prizes won in state regulated bingo are no longer applicable. Also, the deductions for reinvestment of profit from the Michigan Strategic Fund investments are no longer applicable as well. Deduction on Renaissance Zone for zones that are renewed or certified after the 31st of December 2011 is no longer applicable.

On Exemptions

The individual exemption was raised from $3,700 to an annualized individual exemption of $3,763 for 2012. On 2013 onwards, the personal exemption is $3,900. For children 18 years old and below, the $600 exception as well as the special exemption for unemployment compensation that is more than 50 percent of the adjusted gross income no longer applies.

On Credits that are Non-refundable

The credit for contributions to medical savings account, the credit for contributions to food banks, homeless shelters and community foundations, the credit for city income taxes, the credit for donations to Family Development Program, and the credit for public contribution are all no longer applicable.