Monday, January 16, 2012

What You Need to Know About the Pension Tax


State Representative Harvey Santana, whose district includes the Warrendale neighborhood, included an explanation of the changes to how pensions are taxed in Michigan in a recent newsletter. In my opinion, this is the best summary of the changes that I have seen. Therefore, I wanted to include it here, without any further editing from me.

Understanding the taxes on pensions is your Warrendale Tip of the Week.

In May, the Governor signed legislation that changes Michigan’s tax structure. This new legislation took effect on Jan. 1, 2012 and does not apply to or otherwise impact 2011 tax returns that are due in 2012. Instead, the first returns that are affected by this legislation are those returns that are due in 2013.

For tax year (TY) 2011 all Social Security, public pension income, and most private pension income is deductible from the state income tax.

Though I did not support it, beginning in TY 2012, the tax treatment of retirement income will be largely based on the age of the taxpayer. Retirement/pension deductions will be based on the oldest spouse for married taxpayers. Military pensions and retirement benefits received under the federal Railroad Retirement Act will continue to be exempt. However, other retirement income exemptions will phase out the current exemptions based on age:

People 67 years old and older in 2012 are held harmless.

People who are between 60 and 66 years old in 2012 are able to exempt up to $20,000 (for a single taxpayer) or $40,000 (for those married filing jointly) of retirement income.

When these individuals are 67 years old and older, they will receive a special senior exemption of $20,000 (or $40,000 for those married filing jointly) in addition to their Social Security and personal exemptions.

People younger than 60 years old in 2012 will receive no retirement income exemption until they turn 67 years old.

When these individuals are 67 years old and older, they will receive a special senior exemption of $20,000 (or $40,000 for those married filing jointly) OR they may take the Social Security and personal exemptions.

I hope that this information proves useful to you. An additional resource for information on taxes and tax preparation can be found at http://www.michigan.gov/taxes.

As always, I want to be available to you to answer any questions or to hear your thoughts and concerns. You can reach me by contacting me by calling (517) 373-6990 or by email.
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