Pension

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GM Pensions to Follow Ford...With a Twist

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Much like Ford Motor Company’s recent announcement, GM is making pension offers to reduce their pension liabilities. [See my May 4th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?”]

Companies like GM usually desire to pay pensions via a lump sum as this can make their balance sheet look better.  Moreover, due to legislation going back to the Pension Protection Act of 2006 (that is now fully in effect), the cost of paying a lump sum for companies has been reduced.

Now the twist: 

GM retirees that elect to continue the monthly pension method will now have their payments “administered” by The Prudential Insurance Company of America.  Administered in this case has a special meaning; checks will come from Prudential and no longer receive the benefit of being covered and insured by the Pension Benefit Guaranty Corporation (PBGC), a U.S. Government Agency (www.PBGC.gov). Rather, annuity payments from Prudential will carry more limited guarantees from each state (For Michigan see www.milifega.org). Fortunately the insurance industry as a whole has been reliable in terms of paying benefits.  In fact, Prudential has never missed paying an annuity payment.  So, there are arguably less guarantees associated with payments from Prudential – but probably not enough to affect the decision in either direction. 

What to do? General rules and rules of thumb just don’t work here.  First, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks.  Each situation is unique and we have come to different conclusions depending on their individual circumstances.  If we can help you make an informed and prudent decision – one that has the potential to significantly impact (positively or negatively) your wealth for years to come - please feel free to call or email me.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James

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Why Age Matters with Michigan's New Pension Tax: Updated

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Originally posted December 26, 2011

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

No change in current law

  • Social Security is exempt
  • Senior citizen subtraction for interest, dividends and capital gains is unchanged
  • Public pension is exempt
  • For 2012 private pensions subtract up to $47,309 for single filers and $94,618 for joint filers.    

What will happen:  No Michigan tax is withheld from pension payments unless you request it. 

 2.   IF YOU WERE BORN BETWEEN 1946 AND 1952

Before the taxpayer reaches age 67

  • Social Security is exempt
  • Railroad and Military pensions are exempt
  • Not eligible for the senior citizen subtraction for interest, dividends and capital gains.
  • Public and private pension limited subtraction of $20,000 for single filers or $40,000 for joint filers. 

After the taxpayer reaches age 67 (**Will first occur in 2013**)

  • Social Security is exempt
  • Railroad and Military pensions are exempt (but see below)
  • Not eligible for senior citizen subtraction for interest, dividends and capital gains
  • Subtraction against all income of $20,000 for single filers and $40,000 for joint filers.
    • Not eligible for this income subtraction if choosing to claim a military or railroad pension exemption.

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. 

Before the taxpayer reaches age 67

  • Social Security is exempt
  • Railroad and military pensions are exempt
  • Not eligible for the senior citizen subtraction for interest, dividends and capital gains
  • Not eligible for public or private pension subtraction

After taxpayer reaches age 67 (**Will first occur in 2020)

  • Not eligible for senior citizen subtraction for interest, dividends and capital gains
  • Not eligible for public or private pension subtraction
  • Income exemption election:
    • ELECT exemption against all income of $20,000 for single filers or $40,000 for joint filers
      • No exemption for Social Security, military or railroad retirement
      • No personal exemptions

**OR**

  •   ELECT to exempt Social Security, military and railroad pension.  May claim personal exemptions.

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, our advice is to work with your professional advisors if you have any questions about the tax law changes and your pension income. Laurie.Renchik@Centerfinplan.com or Julie.Hall@Centerfinplan.com

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

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Why Age Matters with Michigan's New Pension Tax

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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

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