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Michigan Individual Income Tax - Changes to the Pension Exclusion

  
  
  

Changes to Michigan’s individual income tax (starting in 2012) have received a lot of press -- especially the changes to the pension exclusion. Given all the questions surrounding the changes to the pension exclusion, I thought I would reiterate the changes to the law. Taxpayers will be classified into one of three categories (shown in bold below):

  • Taxpayers born before 1946 continue to have the same treatment of retirement and Social Security income as in prior law, and may claim the personal exemptions for which they are eligible.
  • Taxpayers born in 1946 through 1952 may take an exemption of $20,000 for a single return and $40,000 for a joint return against retirement income until age 67 when they may take that same exemption amount against all types of income.

    These taxpayers at any age may claim personal exemptions for which they are eligible and may exempt Social Security income.  However, the $20,000/$40,000 exemption is not available when total household resources exceed $75,000 for a single return or $150,000 for a joint return.

  • Taxpayers born after 1952 receive no exemption for retirement income until reaching age 67, except for the Social Security exemption.  Once the taxpayer reaches the age of 67,

    1. the taxpayer has a choice between the $20,000/40,000 exemption against all types of income, with no personal exemptions and with no additional exemption for Social Security
      or
    2. continuing the exemption for Social Security, along with the personal exemptions for which they are eligible. 

    However, the $20,000/$40,000 exemption is not available where total household resources exceed $75,000 for a single return or $150,000 for a joint return.

The pension exclusion is dependent on one's age and determines which of the three categories the taxation of pension income fits. If a joint return is filed, the age of the eldest spouse controls which category all pension income fits and how the pension income is taxed.

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