Review of tax changes
It may seem like I am beating this topic to death, but since it is now 2012, I think it is important to review one more time all of the Michigan tax changes that took place on January 1, 2012.
I have been preparing Michigan tax returns since 1978 and there may be more changes that took effect on January 1 than perhaps all of the previous 33 years combined. Not one tax form is untouched. Almost every calculation is affected. Multiple forms became obsolete. About the only item that will not change is the actual tax rate. It will remain at 4.35%. Of course, it was slated to be lowered to 4.25% so even that technically was changed.
Many of those changes will result in either a tax increase or a refund decrease. Most businesses will see a tax decrease and many individuals will see a tax increase or a refund decrease. For purposes of this article, I am concerned with individuals who will see a tax increase or a refund decrease. I emphasize the “will” because these changes will affect a large percentage of the tax filing public.
The most visible change that was made was to the taxability of pensions. Now, for most people, all pensions—whether the pension comes from the state government, from the federal government, from a private company, from an insurance company, or from an individual retirement account—are lumped into the same basket and called “pension income.”
Previously, the taxability of the pension depended upon who paid the pension. Now, age of the recipient is extremely important. Except for seniors born before 1946, it makes no difference where the pension is coming from. For those taxpayers born before 1946, the 2011 rules will continue to apply. Only for taxpayers born before 1946, public pensions paid by a state government or the federal government are totally non-taxable. Only for taxpayers born before 1946, the first $45,842 for singles and $91,864 for joint filers of private pensions paid by a private company, from an insurance company, or from an individual retirement account is not subject to income tax.
For taxpayers born between 1946 and 1952, all pensions are thrown into the same basket and the first $20,000 for singles and $40,000 for joint filers is not taxable.
For taxpayers born after 1952, there is no pension exemption. Period. All pensions from whatever source are fully taxable.
These are historic changes made to the taxability of pensions. Incidentally, the Michigan Supreme Court gave its approval to these changes. In light of these changes, Michigan has revised their withholding form, MI-W4P. The form allows a pension payer to withhold Michigan tax from a pension.
However, other historic changes were also made to other tax provisions. Specifically, the homestead property tax credit formula was totally revised. These changes will also affect a tremendous number of taxpayers.
First, no homestead credit will be allowed for taxpayers having a homestead with a taxable value of $135,000 or more. There is no phase-out. If your homestead has a taxable value of $135,000 or more, there will be no homestead credit. In previous years, there was no maximum on the taxable value.
Second, there will be no homestead credit for taxpayers with total household resource income of more than $50,000. Previously, it took $82,650 to totally phase-out the credit.
Third, for seniors age 65 or more, a full credit will only be allowable for those with total household resource income of $21,000 or less. From $21,000 to $30,000, the credit reduces to 60%. From $41,000 to $50,000 the credit reduces to zero. Previously, seniors age 65 would receive full credit until income reached $73,650 and reduce to zero at $82,650.
These homestead credit changes are substantial and will reduce the credit many taxpayers, not just seniors, may have become accustomed to receiving. By reducing the credit, many seniors will receive a lower refund. Many non-seniors may ultimately have a balance due on their 2012 tax return.
Another set of changes eliminated all personal credits. That means there will be no credit for donations to public radio, TV, museums, libraries, homeless shelter, food banks, or community foundations. Among others, there will be no adoption credit, no city income tax credit, no historic preservation credit, and no college tuition and fees credit.
In addition, the earned income tax credit (EITC) will be limited to 6 percent of the federal EITC amount. Previously, Michigan allowed 20 percent of the federal amount.
Taking all of these changes together, I believe it would behoove taxpayers to discuss their 2012 Michigan tax situation with either a tax professional or do the research online at www.michigan.gov, Michigan’s website, to determine what withholding or estimated tax adjustments must be made. Michigan may assess penalties to taxpayers with a balance due of more than $500 when filing the 2012 tax return. 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.