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Tool | September 2014

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%. Property in Michigan is generally assessed at 50% of its cash value. Annual increases in taxable value are limited to inflation or 5%, whichever is less. Some seniors may be able to delay paying property taxes, and they may be exempt from a portion of the local school tax.

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 paragraph on taxpayers born after 1952 in the section 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 $48,302 (single filers) or $96,605 (joint filers) for 2013. There’s also a deduction for interest, dividends and capital gains up to $10,766 (single) or $21,534 (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.

Property Taxes

Property in Michigan is generally assessed at 50% of its true cash value. Annual increases in taxable value are limited to inflation or 5%, whichever is less. A homestead property tax credit is available to homeowners or renters whose household resources are less than $50,000.

In most school districts, homeowners are exempt from local school operating taxes on their principal residence under the Homeowner's Principal Residence Exemption Program, formerly known as the Michigan Homestead Exemption Program.

Median property tax on the state's median home value of $132,200 is $2,145, 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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