Update on Michigan income tax changes
It’s time for an update on what is going on in Lansing concerning the income tax overhaul. The last week has been very interesting. Almost everything we originally heard Governor Snyder describe in that eventful speech of a few months ago concerning taxes has changed. I say almost everything because the corporate tax rate has remained the same at 6% and it still applies to only 1120C corporations. 1120S and partnerships will not be subject to the 6% tax. All of the non-refundable tax credits, such as the City Income Tax Credit, the Public Contribution Credit, the Community Foundation Credit, the Homeless Shelter/Food Bank Credit, and the College Tuition Credit are still eliminated. In addition, the $1,800 extra exemption for taxpayers age 65 and older and the $600 for dependents is eliminated. From that point on, however, practically everything has changed.
One of the most controversial areas of reform concerned the taxability of pensions. It appears that pensions will be taxed on a tiered basis based on the age of the primary taxpayer. Taxpayers born before 1946 will see no change from the current law. All Social Security will be tax exempt. All public pensions will be tax exempt. The senior citizen exemption for interest, dividends and capital gains will not change. Plus, private pensions will remain tax exempt up to $45,120 for single taxpayers and $90,240 for joint taxpayers.
Taxpayers born between 1946 and 1952, however, fall into a second category. For these taxpayers, the deal isn’t quite as sweet as for those in the first category. Before these taxpayers reach the age of 67, all Social Security will be tax exempt. However, they will not be eligible for the senior citizen exemption for interest, dividends and capital gains. The public and private pension amount that is tax exempt is limited to $20,000 for singles and $40,000 for joint taxpayers. If household income exceeds $75,000 for singles or $150,000 for joint taxpayers, there will be public or private pension subtraction. After these taxpayers reach age 67, their Social Security tax will remain tax exempt. They will not be eligible for the senior citizen exemption for interest, dividends and capital gains.
In a change, the $20,000/$40,000 subtraction will be an exemption against all income and not just public and private pensions. The household income limit of $75,000/$150,000 will continue to apply.
A third class of taxpayers includes those born after 1952. Before these taxpayers reach age 67, their Social Security will be tax exempt. They will not be eligible for the senior citizen exemption for interest, dividends and capital gains. They will not be eligible at all for any public or private pension exemption. After the taxpayers reach age 67, they will have two choices. First, they can elect an exemption against all income of $20,000 for singles and $40,000 for joint filers. However, as a trade-off, they will not get an exemption for Social Security income and they will get no personal exemption subtraction. Also, if their household income exceeds $75,000/$150,000, they will not be eligible for the $20,000/$40,000 income subtraction. The other choice these taxpayers can make is to elect to subtract their Social Security income and claim their personal exemptions. Apparently, the $75,000/$150,000 income phase-out will not apply to these taxpayers. Talk about complicating a tax system.
Another change that most likely will occur concerns the Michigan Earned Income Tax Credit (EITC). Currently, taxpayers receive 20% of the Federal EITC. Governor Snyder proposed to eliminate the 20% and give qualifying taxpayers a $25 credit for each child. There was fierce opposition to this elimination. Evidently, it was quite fierce and quite effective because the new proposal increases the Michigan EITC from $25 up to 6% of the Federal EITC. It’s a decrease from the 20%, but an increase from the $25.
Finally, the property tax credit will begin to phase out at $41,000 and will be completely phased out at $50,000 of household income. Current law starts the phase-out at $73,650. Needless to say, many taxpayers will lose this credit.
Stay tuned for future developments and I am quite sure there will be future developments. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact Jerry at www.actiontaxservice.com.