There were a host of state income tax changes for Michigan seniors that started in  2012, including new taxes on retirement benefits.

AARP Michigan opposed the pension tax because we believe it is a hardship for many seniors on fixed incomes and we thought it was unfair to assess a new levy on pensions after retirement decisions were made based on the tax-free status.

Beginning on January 1, 2012, pension and retirement benefits became subject to Michigan income tax for many recipients. Michigan law now requires the administrators of pension and retirement benefits to withhold income tax on distributions that are subject to tax.

The Michigan Department of Treasury provides this rundown:

What are “pension and retirement benefits”?

Under Michigan law, pension and retirement benefits include most payments that are reported on a 1099-R for federal tax purposes. This includes defined benefit pensions, IRA distributions and most payments from defined contribution plans. Pension and retirement benefits are generally taxable based on date of birth (see age groups below).
Regardless of date of birth, the following are not taxed:

  • US Military pensions
  • Michigan National Guard pensions
  • Social Security
  • Railroad benefits
  • Rollovers not included in the Federal Adjusted Gross Income (AGI)

Certain distributions reported on form 1099R are not pension or retirement benefits. Under Michigan law, these distributions are taxable deferred compensation. Taxable deferred compensation distributions include:

  • All distributions from 457 plans
  • Distributions from 401k or 403B plans sourced to employee contributions and the earnings from those contributions if the contributions were not matched by the employer.

For joint filers, the age of the oldest spouse determines the age categor

Recipients born before 1946:

For 2012 you may subtract all qualifying pension and retirement benefits received from public sources, and may subtract private pension and retirement benefits up to $47,309 if single or married filing separately or up to $94,618 if married filing jointly. Withholding will only be necessary on taxable pension payments (private pension payments) that exceed the pension limits stated above for recipient born before 1946.

  • US Military pensions, Michigan National Guard pensions, Social Security & Railroad benefits continue to be exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Senior citizen subtraction for dividends, interest and capital gains is limited to $10,545 for single filers and $21,091 for joint filers, less any deductions for retirement benefits including US military and Michigan National Guard retirement benefits.

Recipients born between 1946 & 1952:

The first $20,000 for single or married filing separately or $40,000 for married filing jointly, of all private and public pension and annuity benefits may be subtracted from Michigan taxable income. Benefits in excess of these limits are taxable to Michigan.

  • Military pensions, Michigan National Guard pensions, Social Security & Railroad benefits continue to be exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Not eligible for the senior citizen subtraction for dividends, interest and capital gains.

Recipients born after 1952:

All pensions (private and public) and retirement benefits are taxable to Michigan.

  • US Military pensions, Michigan National Guard pensions, Social Security & Railroad benefits continue to be exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Not eligible for the senior citizen subtraction for dividends, interest and capital gains.

The State of Michigan provided this rundown:

Taxing retirement benefits.

 The reduction of the existing exemption for retirement benefits (pensions) will be phased in based on date of birth. The phase-in prevents undue hardship on older seniors.  Retirees born before 1946 are not likely to see any change in the tax treatment of their benefits.  Retirees born during the years 1946 through 1952 will only be taxed on benefits that exceed $20,000/single filer or $40,000/joint filers.  Retirees born after 1952 will be taxed on all of their benefits until reaching age 67.

 Withholding.

 Since most retirees born before 1953 will receive an exemption for some or all of their benefits, retirees should check with their pension administrators to make sure that their withholding is right.

 Tax due with return.

 Generally that tax will be paid from the withholding done by the pension administrator.  However, some retirees may owe tax with their return if too little tax was withheld.

 Estimated tax payment obligation in 2012.

 Most retirees who owe tax with their 2012 income tax return will not be required to make estimated payments in 2012.  A taxpayer is not required to make estimated payments in 2012 if the taxpayer expects to have a tax liability that is $500 or less after withholding and credits.  However, if the taxpayer should make estimated payments in 2012 but doesn’t, there will be no penalty or interest if no estimated payments were required in 2011.  If no estimated payments are made then all tax owed will be due by April 15.

  Please mark the retiree checkbox on the front of the 2012 MI-1040 to assure efficient return processing.

  For more information from the Michigan Department of Treasury, go to this link:

http://www.michigan.gov/taxes/0,4676,7-238-43513_44135-291038–,00.html

 

 

 

 

 Photo by Tax Credits