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Michigan Pension Tax Takes Effect

Michigan’s new pension tax, passed by the Legislature and signed by the governor in 2011, goes on the books in January.

See Also: Will My Pension Go Bust With My Employer?

Public and private pensioners born Jan. 1, 1946 and later will be affected by the tax change. Those born before 1946 will continue to receive the same tax breaks they have been getting.

Starting in January, pension administrators are required to withhold taxes from benefit checks. Monthly tax withholding will range from zero for those with pensions that amount to $1,650 a month or less and up to $101.49 for those with benefits $4,000 and over, according to estimates published by the Michigan Department of Treasury.

Older Michiganders also will be hit with other tax changes that can add hundreds of dollars to their yearly tax bill. These include elimination of the special state income tax exemption for seniors, a substantial reduction in the Earned Income Tax Credit, elimination of credits for charitable contributions, and reductions in Homestead Property Tax Credit for those whose annual household resources are above $21,000.

The three-tiered pension tax works like this:

  • Michigan residents born before 1946 are exempt from the new tax. Public pensions, Social Security payments and military pensions will not be taxed. Income from private pensions, 401(k)s and IRAs will not be taxed on amounts up to $45,120 for single filers and $90,240 for joint filers. About 480,000 tax returns are in this tier.
  • Those born between Jan. 1, 1946 and Dec. 31, 1952 will see all their retirement income subject to tax. Exemptions can be claimed for up to $20,000 for an individual filer and up to $40,000 for joint filers. Above those income levels, retirement income will be taxed at the state income tax rate of 4.35 percent. When these residents turn 67, the $20,000/$40,000 exemption applies to all income, not just retirement income. There are 230,000 returns affected by this.
  • Residents born after 1952 will see all retirement income taxed as regular income at the 4.35 percent rate until they reach age 67. At that time, they qualify for the $20,000/$40,000 exemption on all income, including Social Security. But a taxpayer can choose to forgo the $20,000/$40,000 exemption and instead deduct 100 percent of Social Security income. A taxpayer claiming the $20,000/$40,000 exemption cannot claim the deduction for Social Security or the standard personal exemption. This affects about 150,000 returns.

AARP Michigan continues to oppose the pension tax, largely because it will have a significant impact on pensioners who counted on the no-tax status of pensions when they made their retirement decisions. AARP has sent letters to lawmakers urging them to repeal this unfair tax.

For more information about the pension tax and other tax changes, visit the Michigan Department of the Treasury web site.