Michigan Business Tax Repealed – Individual Tax Provisions

On May 25, 2011, Governor Snyder signed two bills that repeal the Michigan Business Tax, create a Corporate Income Tax (CIT) and revise many pieces of the Michigan Income Tax.  Most provisions take effect January 1, 2012.

Following are highlights of the bills that affect individual taxes.

• The individual tax rate will be 4.35% for 2012 and drop to 4.25% thereafter.
• The standard personal exemption is fixed at $3,700 for 2012 and will be adjusted for inflation thereafter.
• The additional $600 exemption for children under age 19 is eliminated.
• The additional exemption for taxpayers over age 65 is eliminated.
• The city income tax credit and the credits for contributions to public entities, community foundations and homeless shelters/food banks are eliminated.
• The Michigan Earned Income Credit is reduced from 20% of the Federal EITC to 6% of the Federal EITC.
• Homestead property tax credits will be phased out beginning at $41,000 of “household resources” (essentially household income without deduction for net business, rental or royalty losses).
• Taxpayers are ineligible for the Homestead Property Tax Credit if the taxable value of their homestead is greater than $135,000.

Pensions and Social Security

• Taxpayers born before 1946 will have no change in the treatment of their pension income. Social security and public sector pensions are fully exempt; private sector pensions are exempt up to $45,120 for single taxpayers and $90,240 for joint filers. Note that the birth date threshold is based on the eldest of a couple filing married joint, not on the birth date of each taxpayer.
• For taxpayers born between 1946 and 1952, federally taxable Social Security benefits will be exempt, but the exemption for public and private sector pensions will be limited to the lesser of the pension income or $20,000 for a single filer and $40,000 for joint filers. Once the taxpayer reaches age 67, the exemption is set at $20,000 and $40,000, which can offset non-pension income if pension income is less than the exemption amount.
• For taxpayers born after 1952, federally taxable Social Security benefits will be exempt; however, all pension income is taxable until age 67. After reaching at 67, the exemption is limited to $20,000 for single filers, $40,000 for joint filers against all income including federally taxable Social Security. If federally taxable Social Security benefits exceed the exemption amount, then the taxpayer can exempt all of the Social Security benefits.

Read the provisions that affect Michigan business taxpayers.

The provisions of the new laws are quite extensive and will impact virtually all Michigan taxpayers. Contact your local Yeo & Yeo tax professional if you have questions or want to talk about strategies for minimizing your taxes for 2011 and beyond.