Michigan Individual Income Tax Changes for 2012

A legislation restructuring the Michigan Income Tax Act was signed by Governor Rick Snyder. The income tax returns that were due in April 2012 were not affected by the amendment as the legislation will have an impact on those returns that are due next year, April 2013.

If these tax amendments work as the governor and republican lawmakers anticipate they do, it could balance the tax load more reasonably between retirees and the younger employees while also assisting to maintain and to increase job opportunities and decrease the state of Michigan’s high unemployment rate that in November dropped under double digits for the first time in several years. Some are actually concerned that the tax amendments might seize money from the state programs and public education that is around $2 Billion payment made by businesses in Michigan in the past. Some also worry that even if firms hire more employees, the rise in economy could be disregarded by the increase in income tax bills that the tax payers have to make. By 2013, individuals from Michigan will be paying around $1.4 Billion in income taxes more than the amount that they pay prior to this amendment.

The Restructuring of Michigan’s individual income tax that has taken place since January 1, 2012 definitely obtained a lot of attention, especially on the modification to the pension exclusion. Considering all the inquiries around the restructuring to the exclusion of pension, some of the details or important information about the law changes in Michigan should be highlighted:

  1. Tax payers who were born prior to 1946 should continue to have the same processes of retirement and Social Security earning as in prior law, and may still claim the individual exemptions for which they are qualified.
  2. Tax payers who were born from 1946 to 1952 are also allowed to take exemptions of $20000 for single, then $40000 for married (joint return filing) against retirement income until they reach the age of 67 years old when they may obtain the same exemption amount on all types of income.
  3. Tax payers who were born after 1952 are not subject to exemption for retirement income until they reach the age of 67, except for the Social Security exemption.

The state of Michigan has allocated a budget for a number of amendments to the personal income tax and homestead property tax code which will affect the retirement incomes that older tax payers depend upon. While tax payers are advised to have a word with the professionals about these tax law changes and its impact on their circumstances. More detailed information is indicated in this article that will hopefully help in understanding the income tax changes better.

  • Social Security for recent retirees, military pension and active duty military pay continue to be completely exempt from the state income tax.
  • The particular $2300 exemption for tax payers age 65 and above has been removed. The elimination of this exemption will cost tax payers who pay personal income tax around $100 more in income tax ($2300 multiplied by 4.35 percent)
  • The $3700 personal exemption for all individual tax payers will be eliminated for those with household resources from $75000 to $100000 for single tax payers and $150000 to $200000 for married couples. The full tax rate of this exemption $160.95 which is $3700 multiplied by 4.35 percent. Resources include disability and other costs.
  • The present exemption for earning from interest, capital gain and dividends ($10058 for single and $20115 for joint) will continue for adults who were born prior to 1946.
  • Depending on the value of the property, the Homestead Property Tax Credit will fall more or less 40 percent or $200 per year for median income households or those with $31354 total annual income. Those household with earnings above $50000 will no longer be qualified to obtain the credit.
  • 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.
  • Those credits that are refundable and non-refundable and miscellaneous deductions from income are removed, such as charity game prizes, city income tax credit, political contributions and qualifying distributions from a retirement or pension plan that is given to a charity

What is the impact of the pension tax on 3 age categories – Those under age 67 and above, age 60 to 66 and age 59 and below?

For individuals age 67 and above – Both private and public pensions for senior adults age 67 and above continue the tax treatment prior to the 2012 tax amendment. Public pensions remain completely exempt while private pensions are exempt up to $45120 for single and $90240 for married (joint) as per law. The rise in 2012 tax is the result of the eradication of the $2300 senior exemption and the elimination of the $3700 personal tax exemption at higher levels of income. Military pensions and Social Security remain exempt from the income tax.

For individuals age 60 to 66 – Early pensioners will notice an increase in their pension tax in 2012. Public pension under this age range will be taxed, under the Michigan tax law amendment, tax payers with minimum income levels exempt from taxation will be cut from $45120 to $20000 for single tax payers and from $90240 to $40000 for married (joint). The personal exemption of $3700 will be removed at higher levels of income. Again, under this age range, military pensions and Social Security are exempt from the income tax.

For individuals age 59 and below – The younger pensioners age 59 and below will not obtain benefits from pension exemptions for 2012 until they turn 67 years old. The personal exemption of $3700 will be eliminated at higher levels of income. Only the military pensions are exempt from the income tax if the individual is below 60 years old.