Leading up to the election, there was much talk about tax on pension income in Michigan. You may be wondering what the politicians were talking about.
On January 1, 2012, the Michigan law changed so that pension and retirement distributions (payments from an IRA, 401(k), 403(b), 457, pension plan, etc.) are taxed differently depending on the age of the recipient.
Prior to 2012, you could exclude around $90,000 (half that for single filers) in retirement benefits no matter what your age. Social Security benefits were also excluded from tax.
What changed in 2012?
For those born before 1946, basically nothing changed. But for those born in 1946 and later, your age makes a difference on how much of your retirement benefits are subject to tax in Michigan. On a joint return, eligibility is determined by using the age of the older spouse.
If you were born between 1946 and 1952, the pension income exclusion was reduced to $40,000. So, if you filed a joint return and had under $40,000 of income from your retirement plan, you could exclude the entire amount from your state taxable income. The figure is half that for single filers. Again, Social Security benefits are not taxed in Michigan.
For those born after 1952, the exclusion was eliminated, so basically all retirement benefits are subject to Michigan income tax at the standard 4.25% rate. Remember, as mentioned previously, Social Security benefits are not subject to state income tax in Michigan.
The above is a quick summary of the current law, for a detailed explanation and actual tax advice, please contact your tax preparer at Geenen & Kolean, PC.