Jerry Coon

Michigan changes affect tax returns

The questions are starting to flow in with more frequency as we get closer to the end of the year. An increasing number of people are beginning to wonder how all of the changes made by the State of Michigan will affect their tax return to be filed this coming tax season. I don’t blame them for wondering. It’s a fair question to ask because almost every person filing a Michigan return will be affected. There are four major areas of change that we should review. First, there were substantial changes for those receiving retirement benefits. Second, almost all of the non-refundable tax credits were eliminated. Third, exemption amounts were decreased. Fourth, the homestead property tax credit was revamped.

This week, let’s discuss the retirement benefit taxability changes. They are categorized based upon the age of the recipient. For those born before 1946, the pre-2012 rules remain in effect. If I was a baker, I might say they will continue to get the whole loaf of deductions. Their social security is totally exempt from tax. 100 percent of their public pension amount is totally exempt. For private pension recipients, up to $47,309 for single filers and $94,618 for joint filers is exempt. Taxpayers not receiving a pension will continue to receive a subtraction for interest, dividends and capital gains.

Taxpayers born in 1946 through 1952 will get only half a loaf of deductions. Before these taxpayers reach age 67, their social security will be exempt; their railroad pension will be exempt; and their military pension will be exempt. However, they will not receive the subtraction for interest, dividends and capital gains. In addition, the total pension subtraction for public and private pensions will be limited to $20,000 for singles and $40,000 for joint filers. After these taxpayers reach age 67, the rules will change once again. Social security will remain exempt. Railroad and military pension amounts will be exempt but if the taxpayer chooses this deduction, the $20,000/40,000 deduction will not be allowed. The subtraction for interest, dividends and capital gains will not be allowed. Finally, and of most importance, the taxpayer’s $20,000/40,000 deduction will be allowed as a subtraction against all income. Currently, the subtraction is only allowed against pension income but upon obtaining age 67, the subtraction is not based on pension income. This will be a valuable change.

Taxpayers born after 1952 will only get one-quarter of a loaf of deductions. Before they turn 67, they will still receive a total deduction for social security, railroad pensions and military pensions. However, they will not receive a deduction for interest, dividends and capital gains. In addition, they will not receive any subtraction for public or private pensions. Comparing this to the deductions given to the pre-1946 taxpayers, these taxpayers might only be getting one-eighth of a loaf of deductions. Once they turn 67, the rules change again. They will remain ineligible for the deduction for interest, dividends and capital gains and pensions. However, after that they will have an interesting choice to make. They can choose to take a $20,000 for singles/$40,000 for joint filers against all income but if they make this choice they will not receive a deduction for social security, military pension or railroad retirement income; nor will the taxpayers receive a personal exemption deduction. If they don’t choose to the take the $20,000/40,000 deduction, they will receive the social security exemption, the military and railroad pension exemption, and the personal exemption deduction.

Based on this number of variables, it might just take a few more minutes to prepare these tax returns. The pension subtraction used to be taken on a few lines on page 2 of the MI-1040. For 2012, there are so many variables that a two-page form has been created. We don’t have a copy of the form as yet but we do have a one-page retirement benefits worksheet that explains the rules discussed above. Contact my office if you would like a copy of that worksheet. Next week, I will discuss the remainder of the rules taking place in 2012. This is Jerry Coon signing off.


Jerry Coon is an Enrolled Agent and Registered Tax Return Preparer. He owns Action Tax Service on

Northland Dr in Rockford.Contact Jerry through his

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