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Tool | October 2015

State-by-State Guide to Taxes on Retirees

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Michigan

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The Bottom Line
Map of Michigan

Mixed Tax Picture

In recent years, the Great Lakes State has become less tax-friendly for retirees. As of 2012, for retirees born after 1945, more pension income is subject to state income tax. The state imposes a flat-rate income tax of 4.25%. Some seniors may be able to delay paying property taxes.

State Sales Tax

6%. Food and prescription drugs are exempt; electricity for residential use and home heating fuels are taxed at 4%. Michigan has no local sales tax.

Income Tax Range

Michigan has a flat tax rate of 4.25%.

Social Security

Social Security benefits are not taxed in Michigan, although that may change for some taxpayers starting in 2020 (for details, see the information on taxpayers born after 1952 in the sections below).

Exemptions for Other Retirement Income

Michigan has overhauled its income tax rules for retirement benefits.

For taxpayers born before 1946: Military pensions and federal, state and local government pensions are exempt. Private pension income is also exempt, up to $49,027 (single filers) or $98,054 (joint filers) for 2014. There's also a deduction for interest, dividends and capital gains up to $10,929 (single) or $21,857 (joint).

For taxpayers born between 1946 and 1952: Military and Railroad Retirement benefits are exempt from state income tax. These taxpayers, however, may not deduct interest, dividends or capital gains. Other public and private pension income is exempt up to $20,000 (single filers) or $40,000 (joint filers). Once these taxpayers turn 67 years old, the deduction for pension/retirement benefits is replaced by a standard deduction against all income of $20,000 (single) or $40,000 (joint). The standard deduction is reduced by any deductions taken for military retirement benefits or Railroad Retirement income. Beginning in 2013, retirees with pension benefits from employment with a government entity that was exempt from the Social Security Act have higher deduction limits.

For taxpayers born after 1952: Military and Railroad Retirement benefits are exempt from state income tax. These taxpayers, however, may not deduct interest, dividends and capital gains. They also may not exempt other public and private pension income. Once these taxpayers turn 67 years old, they may either deduct Social Security, military and Railroad Retirement income or deduct $20,000 (single filers) or $40,000 (joint filers) from all income sources.

IRAs

Qualifies for Michigan retirement-income exemption.

401(k)s and Other Defined-Contribution Employer Retirement Plans

Distributions from 401(k) and 403(b) plans sourced to employee contributions and the earnings from those contributions if the contributions weren't matched by the employer, as well as all distributions from 457 plans, are considered taxable deferred compensation.

Private Pensions

For taxpayers born before 1946: Private pension income is exempt up to $49,027 (single filers) or $98,054 (joint filers) for 2014.

For taxpayers born between 1946 and 1952: Private pension income is exempt up to $20,000 (single filers) or $40,000 (joint filers). Once these taxpayers turn 67 years old, the deduction for pension/retirement benefits is replaced by a standard deduction against all income of $20,000 (single) or $40,000 (joint). The standard deduction is reduced by any deductions taken for military retirement benefits or Railroad Retirement income.

For taxpayers born after 1952: These taxpayers may not not exempt private pension income. Once these taxpayers turn 67 years old, they may either deduct Social Security, military and Railroad Retirement income or deduct $20,000 (single filers) or $40,000 (joint filers) from all income sources.

Public Pensions

For taxpayers born before 1946: Military pensions and federal, state and local government pensions are exempt. Out-of-state public pensions from states that exempt Michigan public pensions are exempt from tax. Other out-of-state public pensions should be treated as a private pension.

For taxpayers born between 1946 and 1952: Military and Railroad Retirement benefits are exempt from state income tax. Public pension income is exempt up to $20,000 (single filers) or $40,000 (joint filers). Once these taxpayers turn 67 years old, the deduction for pension/retirement benefits is replaced by a standard deduction against all income of $20,000 (single) or $40,000 (joint). The standard deduction is reduced by any deductions taken for military retirement benefits or Railroad Retirement income. Beginning in 2013, retirees with pension benefits from employment with a government entity that was exempt from the Social Security Act have higher deduction limits.

For taxpayers born after 1952: Military and Railroad Retirement benefits are exempt from state income tax. These taxpayers, however, may not deduct interest, dividends and capital gains. They also may not exempt other public pension income. Once these taxpayers turn 67 years old, they may either deduct Social Security, military and Railroad Retirement income or deduct $20,000 (single filers) or $40,000 (joint filers) from all income sources.

Property Taxes

A homestead property tax credit is available to homeowners or renters whose household resources are less than $50,000. The state also has a separate program called the Homeowner's Principal Residence Exemption Program that shields owner-occupied residences from some local school taxes.

Median property tax on Michigan's median home value of $117,500 is $2,090, according to the Tax Foundation.

Tax breaks for seniors: Some seniors, disabled persons, veterans, surviving spouses of veterans and farmers may be able to delay paying property taxes, depending on the county of residence and income level.

Inheritance and
Estate Taxes

There is no inheritance tax or estate tax.

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