Over the next few weeks, I would like to review and provide some general information on the six statewide ballot issues that we will be voting on at the November 6 general election. From an income tax point of view, only Proposal 5 affects what I do for a living in that it would make it harder for the state legislature to create new taxes; raise the rates of existing taxes; or expand the base of any existing tax. A “super majority” or 2/3 of the House and the Senate must approve any such change before it can take effect. I can see why there are people who would want Proposal 5 to go through. The Michigan legislature last year made a tremendous number of changes to the tax system and many of them will cause taxpayers to either pay more tax or receive a decreased refund. Had Proposal 5 been in force, those changes would not have happened. The research seems to bear out the fact that had Proposal 5 been in force as part of our Constitution since 1967, very few tax increases, new taxes, or amendments to existing taxes would have passed the Legislature. 2/3 of anything is a hard number to obtain let alone getting 2/3 of both the House and the Senate to vote in favor of a tax bill. In fact, that is exactly why there will be many people voting against Proposal 5. If 2/3 have to vote for something, that means only 1/3 have to vote against it to stop it from passing. 1/3 of our Michigan Senate is exactly 13 people. That means that 13 people can stop practically any type of tax legislation from ever passing. Talk about the tail wagging the dog. I like making it harder for the legislature to make new taxes but I don’t like the fact that 13 people can hold everyone else hostage. I’m not sure Proposal 5 is the correct way of proceeding with tax reform.
The Michigan Legislature made tremendous changes last year to the Homestead Property Tax Credit. Practically everyone who received a Homestead Property Tax Credit last year will feel the pinch of these changes in the form of a reduced credit. Over the course of last tax season, we ran many comparisons for clients and the over-whelming majority will receive a reduced credit this coming tax year. Granted, in many of those instances, the client would receive a lower refund because the credit is lower, but in some instances, the smaller credit results in a balance due on the tax return. Either way, it’s worth going over the changes that were made to the calculation. First, the term used to define income that must be used to off-set property taxes is now called Total Household Resources. The previous term was simply Household Income. They added “Total” because there are less items allowed to be subtracted from income when calculating Total Household Resources.
For example, under the old rules, if a taxpayer had a loss on a Schedule C business, that loss would reduce Household Income. The new rules do not allow that loss to reduce Total Household Resources. A higher Total Household Resources amount will potentially reduce the Homestead Property Tax Credit. Other losses that will not reduce Total Household Resources include rental losses, Farm losses, and losses from partnerships, Sub S corporations or trusts.
Second, the maximum amount of Total Household Resources income that is allowed before the Homestead Property Tax Credit is phased out is dramatically decreased. Under the old rules, once Household Income reached $73,650, the credit started to phase out and was completely eliminated at $82,650 of Household Income. Under the new rules, at $41,000 of Total Household Resources income, the credit begins to phase out and at $50,000, it is totally phased-out. This change will cause a large number of those currently receiving a credit to be phased-out.
Third, taxpayers with a taxable value of $135,000 or more will not be eligible to receive a credit. Previously, there was no maximum.
Fourth, special rules were instituted for senior citizens and disabled taxpayers. Senior citizens/disabled taxpayers with Total Household Resource income of less than $21,000 will receive 100% of their potential credit. Those with Total Household Resource income of between $21,000 and $30,000 will gradually see their potential credit be reduced down to 60%. Those with Total Resource Income of between $30,000 and $41,000 will receive 60% of their calculated credit. Those with Total Resource Income of between $41,000 and $50,000 will receive a further reduced credit until it is phased-out at the $50,000 mark. Under the previous rules, seniors and the disabled did not receive a reduction until they reached the $73,650 mark of income. Taken as a total, these are dramatic changes in the Homestead Property Tax Credit calculation.
Feel free to contact our office at 616-866-4704 to discuss how these changes might affect your 2012 tax return. 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 website:www.actiontaxservice.com