Michigan held out...they protected people collecting pensions for as long as possible. But the tax breaks are over, as Michigan follows suit with many other states in the nation by taxing pensions. It all begins January 1, 2012. Not all retirees with pension income are affected. However, if your pension income is subject to Michigan tax, under the new rules, you will need to withhold Michigan tax in the amount of 4.35%.
Here’s how the new law may affect you --
1. IF YOU WERE BORN BEFORE 1946
The new State of Michigan income tax doesn’t apply to your pension.
What will happen: No Michigan tax is withheld from pension payments unless you request it.
2. IF YOU WERE BORN BETWEEN 1946 AND 1952
Some of your pension income may be subject to Michigan income tax.
- Up to $20,000 in pension income for single filers
- Up to $40,000 in pension income for joint filers
Once you turn 67, the subtraction allowance applies to all forms of income
What will happen: Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax.
TAXPAYER EXAMPLE:
Tom and Nancy Jones are a married couple. Tom was born in 1947, is retired and collects social security and a pension. Nancy was born in 1951, and is still working.
Tom’s Pension = $30,000
Tom’s Social Security = $20,000
Nancy’s wages = $40,000
Will the Jones' be subject to pension tax in this scenario?
Not under current tax law.
- Pension subtraction = $30,000
- No withholding necessary on pension
- Social security is exempt.
3. IF YOU WERE BORN AFTER 1952
Your pension will be subject to Michigan income tax until you reach age 67. After you reach age 67, if the total income of all people in your household is less than $75,000 for single filers or $150,000 for joint filers, you can subtract the following pension amounts from taxable income on your Michigan income tax forms:
- Up to $20,000 in pension income for single filers
- Up to $40,000 in pension income for joint filers
What will happen: Michigan tax will be withheld from your January 2012 pension payment based on the number of exemptions you requested for your federal income tax.
As always, work with your professional advisors if you have any questions about the tax law changes and your pension income.
Note: Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.
Source: www.michigan.gov