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 |
401(k)s with no employer match are subject to tax |
401(k) distributions attributable to employer contributions or to employee contributions that are |
Senior dividends, interest, capital gains deductible up to $10,058 single/$20,115 joint; indexed to |
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, |
If HHR exceed $75,000 single/$150,000 joint, then cannot take $20,000 single/$40,000 joint |
All military and railroad pensions are deductible, but this deduction effectively reduces the $20,000 |
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 |
All military and railroad pensions are deductible, but this deduction effectively reduces the $20,000 |
When 67……. |
Deduction of $20,000 single/$40,000 joint against ALL types of income – pension, retirement, |
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 |
All military and railroad pensions are deductible, but this deduction effectively reduces the $20,000 |
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 |
- In TY 2013, the personal exemption is estimated at $3,800, the special exemption at $2,400, and the child exemption at $600.
- 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:
- Taxpayers in the born between 1946 – 1952 group are assumed to be 66 and collecting Social Security.
- In TY 2013, the personal exemption is estimated at $3,800, the special exemption at $2,400, and the child exemption at $600.
- Personal exemption is phased out between $75,000 – $100,000 for single households and between $150,000 – $200,000 for joint households.
- 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.
- Michigan Legislature – www.legislautre.mi.gov
- House Fiscal Agency – www.house.mi.gov/hfa
- Description of Recently Enacted Personal Income Tax Changes with Taxpayer Examples