Does Michigan Tax Retirement Income


What Other Michigan Taxes Should I Be Concerned About

How Michigan Taxes Retirees

If you plan on working during retirement, keep in mind that many Michigan cities collect their own income taxes in addition to the state income tax rate of 4.25%. In general, these city income taxes range from about 1% to 1.5%, but the Detroit city income tax is 2.4%. Those taxes do not apply to any form of retirement income, however.

Michigan does not have an estate tax or inheritance tax.

States That Do Not Tax Retirement Income

As of 2021, there are nine states with no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

However, for the 2020 tax year, New Hampshire and Tennessee did tax investment income in the form of interest and dividends at 5% and 1%. If you lived in one of those states during the 2020 tax year and received income from your investments, you will need to file a state tax return.

Keep in mind that states that dont tax income collect their revenue in other ways. This is usually in the form of property taxes and sales taxes. Texas and New Hampshire have some of the highest property tax rates in the country. Tennessee has the highest state and local sales tax rate at 9.55%, according to the Tax Foundation.

Overview Of Michigans Retirement Systems

Public School Employees Retirement System: Defined Benefit Plan Eligible employees for this plan receive both health and disability benefits. Offered under the DB plan are also two additional plans: The Member Investment Plan and the Basic Plan.

Public School Employees Retirement System: Pension Plus Plan The Pension Plus plan essentially offers both DB and DC plans for employees who meet the eligibility requirements. While its ultimately up to you to qualify for the plan, its also up to your employer to contribute to it.

Public School Employees Retirement System: Pension Plus 2 Plan The Pension Plus 2 plan also combines retirement income with a retirement investment account. In addition, the plan offers eligible employees disability and death benefits. One of the key factors that distinguishes the plan from the Pension plus plan is its eligibility requirements.

Public School Employees Retirement System: Defined Contribution Plan Its important to note the benefits that come with this particular plan. Among those are the 401 and 457 investment accounts as well as a Personal HealthCare Fund.

State Employees Retirement System: Defined Contribution Plan Michigans DC plan offers eligible employees a choice between 401 and 457 retirement savings plans. The website also features a comprehensive Plan Resources section that helps users distinguish between the services offered by each system.

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Michigan Retirement System Current Financial Health

At an estimated value of $74 billion, Michigans ORS provides one of the most beneficial public pension systems in the U.S. In addition, it serves more than 530,000 customers, all of which are either employees, judges, state police or National Guard members. Out of that amount, 227,000 are active and 281,500 are retired. Whats more, Michigans ORS represents one of every 14 Michigan adults.

Beyond its Social Security tax exemption, Michigans ORS has also sustained some notable accomplishments. In 2017, it earned the 2017 Standards Award from the Public Pension Coordinating Councils Standards Program for both its administration and funding efforts. It also received another award, in the same year, for its DC plans performance. But besides its accolades, Michigans retirees have significantly improved the states economy. For instance, every dollar paid out in pension benefits supported $1.42 in Michigans total economic activity. In addition, each dollar Michigan taxpayers contributed to its retirement plans supported $5.68 in total economic activity.

Social Security And A 401 Withdrawal

States That Tax Social Security Benefits

The math gets a little trickier if you are collecting social security. At most, 85% of your social security is subject to taxation, and depending on your income, there are cases in which none of your social security is taxed.

Lets look at the same example as above, but also the couple is collecting $30,000 in social security. In this case, 85% of the social security benefit would be taxable as well as the $50,000 in 401 distributions. 85% of $30,000 is $25,500 plus the $50,000 401 distribution means that they have $75,500 in income. From there, subtract $24,400 standard deduction and this couple would have $51,100 in taxable income. To calculate the income taxes, they pay 10% on the first $19,400 and 12% on the next $31,700. Total taxes are $5,744 and the effective tax rate would be 7.6%.

You probably arent surprised that the more than you earn, or withdraw from your retirement accounts, the more you pay in taxes.

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Michigan Retirement Taxes Are Based On Your Age

Michigan state taxes on pensions and pre-tax retirement withdrawals are a little more complicated. In 2012, Michigan made some changes and went from very retiree tax friendly to less tax friendly. Now, the amount of state taxes that you pay is based on the age of the participant.

If you were born before 1946: If you are single, the first $51,570 of pension and pre-tax withdrawals are Michigan state tax free. If you are married, the first $103,140 of pension income is state tax-free.

If you were born between 1946 and 1952: The first $20,000 if you are single and $40,000 if you are married is state tax free.

If you were born after 1952: All pension and pre-tax retirement income is subject to Michigan state taxes.

If you are under the age of 65, be prepared to pay state taxes and federal taxes on the full amount of your pension and pre-tax withdrawals.

Recipients Born Before 1:

For 2021 you may subtract all qualifying retirement and pension benefits received from public sources, and may subtract private retirement and pension benefits up to $54,404 if single or married filing separately or up to $108,808 if married filing jointly. Private subtraction limits must be reduced by public benefits subtracted. Withholding will only be necessary on taxable pension payments that exceed the pension limits stated above for recipient born before 1946.

  • Complete Form 4884, Michigan Pension Schedule.
  • Military pensions, Michigan National Guard pensions and Railroad Retirement benefits are entered on Schedule 1, line 11. These continue to be exempt from tax. They must be reported on Schedule W Table 2, even if no Michigan tax was withheld.
  • Social Security benefits included in your adjusted gross income are entered on Schedule 1, line 14 and are exempt from tax.
  • Public pensions can include benefits received from the federal civil service, State of Michigan public retirement systems and political subdivisions of Michigan.
  • Rollovers not included in the Federal Adjusted Gross Income will not be taxed in Michigan.
  • Subtraction for dividends, interest, and capital gains is limited to $12,127 for single filers and $24,254 for joint filers, less any subtractions for retirement benefits including US military, Michigan National Guard, and railroad retirement benefits.

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Social Security And Medicare Taxes

Remember how I told you that if you work or draw money from your 401, the taxation is the same? Well, that is true on a federal level, but you have a huge tax benefit as a retiree that you dont have while you are working. You dont pay any social security or Medicare taxes on your income. While you are working, you pay 7.65% on your income to Mr. FICA. This is a huge tax saving in retirement.

How Much Can A Retired Person Earn Without Paying Taxes In 2020

Michigan to Go Tax Free For Retirees?

For retirees 65 and older, heres when you can stop filing taxes: Single retirees who earn less than $14,250. Married retirees filing jointly, who earn less than $26,450 if one spouse is 65 or older or who earn less than $27,800 if both spouses are age 65 or older. Married retirees filing separately who earn less than

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Michigan Earned Income Tax Credit

If you claim an EITC on your federal tax return, you can claim one on your Michigan income tax return as well. The Michigan EITC is equal to 6% of your federal credit.

The federal EITC income cap ranges from $21,430 to $57,414 depending on how you file and how many children or relative dependents you claim. The maximum federal EITC amount you can claim on your 2021 tax return is $6,728.

For example, if youre eligible for $3,000 federally, you can claim $180 through the Michigan EITC.

Why I Should Live In Michigan

Simply put, Michigan is gorgeous. From the Great Lakes to its 103 state park and recreation areas, Michigan is an oasis of natural beauty. Further, Michigan contains some of the most stunning natural destinations globally, including the Sleeping Bear Dunes and the Pictured Rocks National Lakeshore in the UP.

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Michigan 529 Contributions Deduction

Contributions to Michigan Education Savings Program , MI 529 Advisor Plan , and Michigan Achieving a Better Life Experience Program 529 accounts may be deducted. Deductions for these contributions are capped at $10,000 for single filers and $20,000 for joint filers. For the MESP and MAP accounts, the maximum deduction is $5,000 combined for a single taxpayer and $10,000 combined for couples filing jointly. The same cap applies to MiABLE accounts.

Recipients Born During The Period January 1 1946 Through December 31 1:

Tax Burdens by State

If the older of you or your spouse was born during the period January 1, 1946 through December 31, 1952, and reached the age of 67, you are eligible for a deduction against all income and will no longer deduct retirement and pension benefits. Complete Schedule 1, line 23 instead of Michigan Pension Schedule, Form 4884.

The deduction is $20,000 for a return filed as single or married, filing separately, or $40,000 for a return filed as married, filing jointly. If you checked either SSA Exempt box 22C or 22G from Schedule 1, your deduction is increased by $15,000. If you checked both boxes 22C and 22G your deduction is increased by $30,000.

The standard deduction is reduced by military pay , military and/or railroad retirement benefits

A surviving spouse who meets all of the following conditions may elect to take the larger of the retirement and pension benefits deduction based on the deceased spouse’s year of birth subject to the limits available for a single filer or the survivor’s Michigan Standard Deduction:

  • Reached the age of 67 and
  • Not remarried and
  • Claimed a subtraction for retirement and pension benefits on a return jointly filed with the decedent in the year they died.

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States With Income Tax Breaks

Other states still offer retirees tax breaks on retirement income. Illinois, Mississippi, and Pennsylvania dont tax distributions from 401 plans, IRAs, or pensions and Alabama and Hawaii don’t tax pension income but do tax distributions from 401 plans and IRAs.

These 24 states exempt or provide a tax credit for a portion of pension income: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia, and Wisconsin.

These states dont tax military retirement income: Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Dakota, Ohio, Pennsylvania, West Virginia, and Wisconsin.

Tips For A Successful Retirement

  • Saving for retirement is vital. But its also important to preserve that savings by finding out the best location for you to spend your retirement. The state in which you choose to retire could either make or break your financial future. SmartAsset analyzed each states taxes to determine the most tax-friendly states in the U.S.. So when you make your final decision, youll want to make sure your locations tax system aligns with your financial goals.
  • Sometimes planning for retirement, as well as meeting a particular plans eligibility requirements, can be complex. However, the professional advising of a financial advisor can significantly ease this process. SmartAssets financial advisor matching tool can help you find the most suitable financial advisor in your area.

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Homestead Property Tax Credit

If you own property in Michigan and live in the state at least half the year, you may be eligible for the homestead property tax credit. The credit is available for taxpayers who have total household resources below $60,600.

Total household resources include income, capital gains, and other money you have received. See page 27 of the instructions for the Michigan 1040 form for a full list of whats included in total household resources.

If the taxable value of your property exceeds $136,600, youre not eligible to receive the credit.

Taxes On Retirement Benefits Vary From State To State

Retirement Taxes in Michigan

Nine states currently have no tax on regular or retirement income: Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington or Wyoming. Other states can treat retirement income taxes very differently.

For example, Tennessee will stop taxing all forms of retirement income entirely in 2021. The Hall tax on bond and note interest and stock dividends will be wholly repealed at that time. Oregon taxes most retirement income at the top rate while allowing a credit of up to $6,250 for retirement distributions.

Some states exempt all pension income and most exempt Social Security benefits. Other states provide only partial exemption or credits, and some tax all retirement income.

Fourteen states currently exempt pension income entirely for qualified individuals. If this is important to you and youre looking for a warmer climate, consider retiring in Alabama, Florida, Hawaii, Mississippi, Nevada, Tennessee or Texas. Other states with no tax on pension are New Hampshire, Pennsylvania, Alaska, South Dakota, Illinois, Washington and Wyoming.

You will learn about how each state taxes or exempts retirement income from our research.

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What Distributions Do Not Qualify For A Subtraction

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

  • All distributions from 457 plans
  • Distributions from 401 or 403 plans sourced to employee contributions and the earnings from those contributions if they were not matched by the employer.
  • Early distributions under the terms of the retirement plan are always taxable regardless of the date of birth of the taxpayer.

NOTE: When considering your pension subtraction, ‘surviving spouse’ means the deceased spouse died prior to the current tax year . Deceased spouse benefits do not include benefits from a spouse who died in 2021. If you or your spouse received pension benefits from a deceased spouse, see Form 4884, Michigan Pension Schedule instructions.

How Are Retirees Taxed In Michigan

Michigan retirees born before 1946, about of all Michigan pensioners, are unaffected and whose public pensions are fully tax-exempt. Retirees born between 1946 and 1952 can deduct the first $20,000 of pension income for single taxpayers and $40,000 for married couples filing jointly prior to age 67.

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What Are Qualified Distributions

A subtraction is allowed on the Michigan return for qualifying distributions from retirement plans. Retirement plans include private and public employer plans, and individual plans such as IRA’s. To be considered a qualified distribution for the subtraction, several requirements must be met. For employer plans, an employee must have retired under the provisions of the plan, the pension benefits must be paid from a retirement trust fund, and the payment must be made to either the employee or a surviving spouse.

For qualifying distributions, there may be a limitation on the amount of the exemption that can be claimed.

Home Heating Tax Credit

The Kiplinger Tax Map: Guide to State Income Taxes, State Sales Taxes ...

Michigan residents who meet certain qualifications may request a . Partial-year residents are eligible, but students who are being claimed as someone elses dependent, residents of college or university-operated housing and those living in licensed care facilities are generally not eligible.

The standard credit has a maximum income ceiling of $39,157 and a maximum allowance of $1,371 . The alternate credit computation, which uses your heating costs to determine the amount of your credit, has an income ceiling of $27,700.

You must fill out the Home Heating Credit Claim MI-1040CR-7 form to determine your eligibility. The deadline for that submission is Sept. 30, 2022.

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Looking For More Help

Are you a Michigan retiree, or close to retirement, and want to minimize your taxes? RetireMitten Financial is a Michigan based fee-only financial planner that specializes in working with familys to live a stress-free retirement. This includes keeping more of your hard-earned money and maximizing your retirement income. Schedule a complimentary meeting at the link below.

How Much Of My Pension Is Taxable In Michigan

Michigan retirees born before 1946, about of all Michigan pensioners, are unaffected and whose public pensions are fully tax-exempt. Retirees born between 1946 and 1952 can deduct the first $20,000 of pension income for single taxpayers and $40,000 for married couples filing jointly prior to age 67.

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Proposed Repeal Of Michigan Pension Tax Prompts Fairness Debate

Jan. 26, 2022: Whitmer: Cut taxes, boost schools. Michigan GOP agrees, but devils in details

Is it fair to tax some Michiganders retirement income and not others?

Democratic Gov. Gretchen Whitmer and GOP lawmakers who control the budget process will have to contend with that question this spring as they negotiate whether Whitmers campaign promise to undo her Republican predecessors tax on some retirement income will be built into the states next budget.

Support for doing away with former Gov. Rick Snyders so-called pension tax is gaining steam among some legislators from both parties, who say repeal would do right by seniors who were asked to shoulder more of the states income tax burden in 2011 to help pay for a more than $1 billion tax cut for businesses.

But defenders of the tax, who include some Republican legislators and business groups, also cite fairness as a primary concern namely, that all forms of retirement income should be taxed similarly. The 2011 tax change ended a 100-percent income tax break for government pensions and lowered deductions for private retirement income, including pensions and individual retirement savings, bringing more parity to public and private retirement benefits.

Related: Budget tests Gretchen Whitmers promise to repeal Michigan pension tax

Those contrasting views have House and Senate lawmakers working on a legislative compromise, said Gideon DAssandro, spokesman for House Speaker Lee Chatfield, R-Levering.

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