On
May 25, 2011, Governor Snyder signed a package of tax bills which substantially
restructured Michigan's business tax and amended parts of Michigan's individual
income tax. The most significant change is the repeal of the
Michigan Business Tax and replacing it with a Corporate Income Tax. From all accounts the restructuring shifts $1.7 billion of tax from
corporations to individuals. The changes are effective January 1, 2012.
Listed
below are highlights of the changes affecting Michigan individual
taxpayers:
●
The current tax rate was scheduled to decline from 4.35% to 4.25% on October 1,
2011. The tax rate will remain at 4.35% through January 1, 2013, and then
lowers to 4.25% for periods on or after January 1, 2013.
● Taxpayers born after 1945 are no longer able to deduct a portion of
interest, dividends, and capital gains received.
● Taxpayers no longer receive an additional $600 exemption per dependent
child under the age of 19.
● Some Michigan taxpayer's retirement income will no longer be exempt from
tax:
○ Distributions from certain individual retirement accounts used to pay
qualified higher education expenses are no longer deductible.
○ Retirement and
pension income of taxpayers
born before 1946 remains exempt
from income tax.
○ For taxpayers born between 1946
and 1952, until the taxpayer reaches age 67, a limited exemption ($20,000
for a single return or $40,000 for a joint return) against pension and
retirement income (whether public or private pension or retirement income) is
available. Once the taxpayer reaches age 67, the limited exemption ($20,000 for
a single return or $40,000 for a joint return) is available against all types of
income (retirement and nonretirement income). The exemptions for social security
income shall always be available. Regardless of age, if total household resources (defined as
income from all sources after adding back certain deductible losses) exceed
$75,000 for a single return, or $150,000 for a joint return, the $20,000/$40,000
exemption is eliminated.
○ For taxpayers born after 1952, until the taxpayer reaches
the age of 67, the exemption of public or private pension or retirement income
other than social security income is eliminated (social security income remains
exempt). Once the taxpayer reaches age 67, the limited exemption ($20,000 for a
single return or $40,000 for a joint return) is available against all types of
income (retirement and nonretirement income and social security income). A
taxpayer may forgo the $20,000/$40,000 exemption and instead deduct 100% of
social security income and personal exemptions. Regardless of age, if total
household resources exceed $75,000 for a single return, or $150,000 for a joint
return, the $20,000/ $40,000 exemption is eliminated.
○ For a joint return, the limitations and restrictions discussed above are
applied based on the age of the older spouse filing the joint
return.
● The standard personal exemption for taxpayers and each dependent is fixed
at $3,700 through tax year 2012. Beginning in 2013, the exemption
will be adjusted annually for inflation occurring.
● The standard personal exemption is 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.
● The additional $1,800 exemption allowed for each taxpayer age 65 and
older, and each dependent of the taxpayer, is eliminated.
● Political contributions are no longer deductible.
● All non-refundable credits are eliminated, including:
○ The City Income Tax Credit.
○ The Public Contribution Credit, for contributions to public entities such
as State universities, public libraries, and the State museum.
○ The College Tuition Credit, which provides a credit equal to 8% of
tuition costs for residents attending a university or college that increased its
tuition from the prior year by less than the rate of inflation.
○ The Vehicle Donation Credit, which provides a credit for automobiles
donated to qualified organizations.
● For tax years after 2011, the Michigan Earned Income Tax Credit is
eliminated. Taxpayers eligible to receive the Federal Earned
Income Tax Credit are eligible for a credit of $25 for each minor child residing
with them.
● A variety of changes are made to the Homestead Property Tax
Credit:
○ Taxpayers are no longer eligible for the credit if the taxable value of
their homestead exceeds $135,000.
○ The credit is phased out starting at total household resources of $41,000
and is eliminated once total household resources reach $50,000, regardless of
filing status (single or married).
○ Non-Senior citizen taxpayers will receive a credit equal to
60% of the amount by which property taxes exceed 3.5% of the total
household resources, regardless of filing status (single or
married).
○ Generally, seniors and disabled individuals are able to receive 100%. However, the credit is gradually reduced starting at total
household resources of $21,000 and to a maximum credit of 60% once household
resources exceed $30,000.
We
have provided an overview of the changes and we welcome the opportunity to
discuss the tax changes in the context of your individual income tax
situation.
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