New Personal Income Tax Changes

Below you will find further information about the personal income tax changes in the Public Act (PA) 28 of 2011, which became effective on Janury 1, 2012. Business tax changes, which can be found in PA 39 and 40 of 2011, were also among the recent tax restructuring.

PA 38 of 2011

PA 38 of 2011 contains several changes to the personal income tax, the most significant are freezing the personal income tax rate at 4.25%, modifications to the pension deductions, reducing the earned income tax credit (EITC), modifications to the homestead property tax credit (HPTC), and elimination of the most the credits. These changes, as shown below in Table 1, are estimated to increase personal income tax revenue by an estimated $559.1 million in FY 2011-12.

Table 1: Estimated Fiscal Impact of Tax Changes Included in Public Acts 38 – 40 of 2011
Effective Date January 1, 2012 (millions of dollars)

  FY 2011-12 Estimates FY 2012-13 Estimates
Personal Income Tax Change GF/GP SAF Total GF/GP SAF Total
Freeze Income Tax Rate at 4.25% effective 1/1/13 $172.0 $0.0 $172.0 $223.0 $0.0 $223.0
Eliminate Senior & UI Special Exemptions 6.7 2.1 8.8 41.0 0.0 41.0
Eliminate Child Deduction 0.0 0.0 0.0 57.1 0.0 57.1
Phase Out Personal Exemption 42.0 13.1 55.1 63.1 20.3 83.4
Modify Public/Private Pension Deduction 177.4 47.5 224.9 259.6 83.7 343.4
Repeal Senior Investment Deduction (Age Based) 3.2 0.8 4.0 4.7 1.5 6.2
Eliminate Miscellaneous Subtractions 28.1 7.2 35.3 40.8 13.2 54.0
Single Sales Apportionment Factor (11.9) (3.1) (15.0) (16.5) (4.2) (20.7)
Reduce 20% Refundable EITC to 6% 0.0 0.0 0.0 261.6 0.0 261.6
Modify Homestead Property Tax Credit 0.0 0.0 0.0 270.2 0.0 270.2
Eliminate Most Credits 74.0 0.0 74.0 104.5 0.0 104.5
Total Personal Income Tax Changes $491.5 $67.6 $559.1 $1,309.1 $114.5 $1,423.7
 
Total Business Tax Changes ($336.7) ($757.6) ($1,094.3) ($871.0) ($776.6) ($1,647.6)
 
Total Tax Changes $154.7 ($689.9) ($535.2) $438.0 ($662.1) ($224.0)

Personal Exemption Phase-Out

Currently, the personal exemption is $3,700 (indexed to inflation) for each exemption claimed on the federal return, generally the number of individuals in a household. Effective January 1, 2012, the personal exemption will be phased out based on household resources (HHR) and filing status (single or joint returns). Table 2 shows the new personal exemption phase-out for taxpayers between those incomes ranges.

Table 2: Examples of Personal Exemption Phase-Out for Single and Married Taxpayers

Single Taxpayers – Exemption Per Person Married Taxpayers – Exemption Per Person
Household
Resources		 % of $3,700 Eligible
to Take		 Personal
Exemption		 Household
Resources		 % of $3,700 Eligible
to Take		 Personal
Exemption
<$75,000 100% $3,700 <$150,000 100% $3,700
77,000 92% 3,404 154,000 92% 3,404
79,000 84% 3,108 158,000 84% 3,108
81,000 76% 2,812 162,000 76% 2,812
83,000 68% 2,516 166,000 68% 2,516
85,000 60% 2,220 170,000 60% 2,220
87,000 52% 1,924 174,000 52% 1,924
89,000 44% 1,628 178,000 44% 1,628
91,000 36% 1,332 182,000 36% 1,332
93,000 28% 1,036 186,000 28% 1,036
95,000 20% 740 190,000 20% 740
97,000 12% 444 194,000 12% 444
99,000 4% 148 198,000 4% 148
>$100,000 0% 0 >$200,000 0% 0

Calculation:
Personal Exemption Multiplied ($100,000 – Total HHR)/$25,000

Calculation:
Personal Exemption Multiplied($200,000 – Total HHR)/$50,000

Pension Deductions

For the 2011 tax year, social security, public pension income and most private pension income is deductible from the state income tax. For the 2012 tax year, the tax treatment will be based on the taxpayer’s age and income or HHR. Retirement/pension deductions will be based on the oldest spouse for married taxpayers.

The below table provides you with detailed information on the tax treatment of pension and retirement income for the 2011 and 2012 tax years based on the PA 38 of 2011. Taxpayers who are 67 or older in 2012 will have no change in the treatment of retirement/pension income. Taxpayers between 60 and 66 and those under the age of 60 in 2012 will be able to take smaller deductions.

Table 3: Changes to the Treatment of Pension, Retirement, and Investment Income Under PA 38 of 2011

Treatment Prior to PA 38 of 2011 (Tax Year 2011)

Social Security and public pensions are deductible

Private pensions (defined benefit plans, IRAs, and private annuities) are deductible up to $45,120
single/$90,240 joint; indexed to inflation; the maximum allowable deduction is reduced by the public
pension subtraction

401(k)s with no employer match are subject to tax

401(k) distributions attributable to employer contributions or to employee contributions that are
matched by the employer are deductible, but distributions attributable to employee contributions that
are not matched by the employer are subject to tax

Senior dividends, interest, capital gains deductible up to $10,058 single/$20,115 joint; indexed to
inflation; the maximum allowable deduction is reduced by the private and public pension subtractions
Treatment Under PA 38 of 2011 (Beginning in Tax Year 2012)
1) People <60 in 2012 (born after 1952):

No pension or retirement deduction until age 67

No senior investment income deduction

Social Security deductible

All military and railroad pensions are deductible
When 67…….

Deduction of either (1) $20,000 single/$40,000 joint against all types of income – pension, retirement,
investment, and salary and wages, but cannot also take the personal exemption or the additional
deduction for Social Security or (2) take Social Security deduction and the personal exemption

If HHR exceed $75,000 single/$150,000 joint, then cannot take $20,000 single/$40,000 joint
deduction

All military and railroad pensions are deductible, but this deduction effectively reduces the $20,000
single/$40,000 joint deduction by an equal amount
2) People 60 – 66 in 2012 (born between 1946 and 1952):

Deduction of $20,000 single/$40,000 joint against pension and retirement income

No senior investment income deduction

Social Security deductible and eligible to take personal exemption

If HHR exceed $75,000 single/$150,000 joint, then cannot take $20,000 single/$40,000 joint
deduction

All military and railroad pensions are deductible, but this deduction effectively reduces the $20,000
single/$40,000 joint deduction by an equal amount
When 67…….

Deduction of $20,000 single/$40,000 joint against ALL types of income – pension, retirement,
investment, and salary and wages

Social Security deductible and eligible to take personal exemption

If HHR exceed $75,000 single/$150,000 joint, then cannot take $20,000 single/$40,000 joint
deduction

All military and railroad pensions are deductible, but this deduction effectively reduces the $20,000
single/$40,000 joint deduction by an equal amount
3) People =>67 in 2012 (born before 1946):

Same as law prior to PA 38 of 2011

Homestead Property Tax Credit (HPTC)

Michigan taxpayers with a household income of $82,650 or less can declare the HPTC. The credit is equal to 60% of the amount by which property taxes exceed 3.5% of household income, up to a maximum of $1,200. For taxpayers with household income between $73,650 and $82,650, the credit is reduced 10% for every $1,000 above the lower limit.

In the 2012 tax year, taxpayers who currently take the HPTC with income between $50,000 and $82,650 or that have a homestead in which the taxable value exceeds $135,000 will no longer be able to take the credit. In addition, for taxpayers with HHR between $41,000 and $50,000, the credit will be reduced 10% for every $1,000 above the lower limit. The below table will show how the new HSPTC is calculated.

Table 4: Homestead Property Tax Credit Calculation Under Public Act 38 of 2011

Step 1: Credit equals the amount by which 100% of property taxes paid exceed 3.5% of HHR, up to $1,200
Step 2: Non-Seniors – multiply credit from Step 1 by 60%; Seniors – multiply credit from Step 1 by the property tax factor schedule below
HHR Range Property Tax Factor
$30,001 – $50,000 60%
30,000 64%
29,000 68%
28,000 72%
27,000 76%
26,000 80%
25,000 84%
24,000 88%
23,000 92%
22,000 96%
< = $21,000 100%
Step 3: All taxpayers – multiply the result from Step 2 by the phase-out schedule below to obtain the final credit
HHR Range Phase-Out
> $50,000 no credit
50,000 10%
49,000 20%
48,000 30%
47,000 40%
46,000 50%
45,000 60%
44,000 70%
43,000 80%
42,000 90%
< = $41,000 full credit

Taxpayer Examples

Tables 5 and 6 are examples of the impact of the tax changes for taxpayers with and without retirement income for the 2013 tax year. The credits that will be eliminated are not included in the examples.

Table 5: Taxpayer Examples (Without Retirement Income) Under the Enacted Personal Income Tax Changes: Tax Year 2013

  Married
Couple
with two
Children		 Single
Parent
with two
Children		 Married
Couple
with one
Child		 Married
Couple
with two
Children		 Married
Couple
with three
Children		 Married
Couple
with two
Children		 Single
Person
with No
Children		 Married
Couple
with No
Children
Income
Pension/Retirement $0 $0 $0 $0 $0 $0 $0 $0
Social Security $0 $0 $0 $0 $0 $0 $0 $0
Earned Income (wages/salaries) $32,000 $22,000 $45,255 $55,000 $110,000 $250,000 $85,000 $170,000
Other Income $2,400 $0 $0 $250 $1,500 $0 $0 $0
Total Income $34,400 $22,000 $45,255 $55,250 $111,500 $250,000 $85,000 $170,000
 
Property taxes $1,840 $1,440 $2,250 $3,000 $3,500 $4,500 $4,000 $4,000
 
Tax Law Prior To Changes:
Current personal/special/child exemptions (1) $16,400 $12,600 $12,000 $16,400 $20,800 $16,400 $3,800 $7,600
                 
Pre-Credit Tax = taxable income x 4.125% $743 $388 $1,372 $1,603 $3,741 $9,636 $3,350 $6,699
 
Refundable credits
Homestead property tax credit $382 $402 $400 $640 $0 $0 $0 $0
EITC $461 $429 $0 $0 $0 $0 $0 $0
 
Net Income Tax Prior To Changes ($100) ($444) $972 $963 $3,741 $9,636 $3,350 $6,699
 
Tax Law With Enacted Changes:
New personal exemption (2) $15,200 $11,400 $11,400 $15,200 $19,000 $0 $2,280 $4,560
 
Pre-Credit Tax = new taxable income x 4.25% $816 $451 $1,439 $1,702 $3,931 $10,625 $3,516 $7,031
 
New Refundable credits                
Homestead property tax credit $382 $402 $200 $0 $0 $0 $0 $0
EITC $138 $129 $0 $0 $0 $0 $0 $0
 
Net Income Tax With Enacted Changes $296 ($80) $1,239 $1,702 $3,931 $10,625 $3,516 $7,031
 
Net Increase $396 $363 $267 $739 $190 $989 $166 $332
  1. In TY 2013, the personal exemption is estimated at $3,800, the special exemption at $2,400, and the child exemption at $600.
  2. Personal exemption is phased out between $75,000 – $100,000 for single households and between $150,000 – $200,000 for joint households.

Table 6: Taxpayer Examples (With Retirement Income) Under the Enacted Personal Income Tax Changes: Tax Year 2013

  Retired
Couple
Born after
1952		 Retired
Couple
Born after
1952		 Retired
Senior Couple
Born between
1946 – 1952		 Retired
Senior Couple
Born between
1946 – 1952		 Retired
Couple
Born on or
before 1946		 Retired
Couple
Born on or
before 1946		 Working/Retired
Senior Single
Born between
1946 – 1952		 Working/Retired
Senior Couple
Born between
1946 – 1952
Income
Pension/Retirement $30,000 $48,000 $30,000 $48,000 $30,000 $48,000 $0 $0
Social Security (1) $0 $0 $22,000 $27,000 $22,000 $27,000 $15,000 $27,000
Earned Income (wages/salaries) $0 $0 $0 $0 $0 $0 $30,000 $42,000
Other Income $5,000 $5,000 $0 $5,000 $0 $5,000 $0 $0
Total Income $35,000 $53,000 $52,000 $80,000 $52,000 $80,000 $45,000 $69,000
 
Property taxes $2,250 $4,000 $2,250 $4,000 $2,250 $4,500 $2,000 $2,500
 
Tax Law Prior To Changes:
Current personal/special/child exemptions (2) $7,600 $7,600 $12,400 $12,400 $12,400 $12,400 $6,200 $12,400
 
Pre-Credit Tax = taxable income x 4.125% $0 $0 $0 $0 $0 $0 $982 $1,221
 
Refundable credits                
Homestead property tax credit $615 $1,200 $430 $360 $430 $360 $425 $85
EITC $0 $0 $0 $0 $0 $0 $0 $0
 
Net Income Tax Prior To Changes ($615) ($1,200) ($430) ($360) ($430) ($360) $557 $1,136
 
Tax Law With Enacted Changes:
New personal exemption (3) $7,600 $7,600 $7,600 $7,600 $7,600 $7,600 $3,800 $7,600
New pension/retirement deduction (4) none, until age 67 $40,000 $40,000 no change from prior law $20,000 $40,000
 
Pre-Credit Tax =new taxable income x 4.25% $1,165 $1,930 $0 $230 $0 $0 $1,114 $1,462
 
New Refundable credits
Homestead property tax credit $615 $0 $0 $0 $0 $0 $153 $0
EITC $0 $0 $0 $0 $0 $0 $0 $0
 
Net Income Tax With Enacted Changes $550 $1,930 $0 $230 $0 $0 $961 $1,462
 
Net Increase $1,165 $3,130 $430 $590 $430 $360 $404 $326

Notes:

  1. Taxpayers in the born between 1946 – 1952 group are assumed to be 66 and collecting Social Security.
  2. In TY 2013, the personal exemption is estimated at $3,800, the special exemption at $2,400, and the child exemption at $600.
  3. Personal exemption is phased out between $75,000 – $100,000 for single households and between $150,000 – $200,000 for joint households.
  4. See Table 3.

For More Information

For more information about these changes, please visit the following website pages. Feel free to also contact one of our professionals at 810-238-4617.