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Is Michigan A Tax-Friendly State For Senior Citizens To Live?

 

Retirement is often an exciting time in a person’s life.  He or she can break free of the rat race and pursue ambitions that were impossible to achieve while working.  However, retirement can also be a scary time in that the individual may have to live on a fixed income for the rest of his or her life.  As a result, a senior citizen’s decision of where to live will revolve heavily around affordability.  Whether a particular state is affordable will depend on factors such as housing prices, the costs of goods and services, and tax considerations.  How does Michigan compare with other states as far as being tax friendly to senior citizens?

Michigan levies a flat rate tax of 4.25% on qualifying income (some cities and municipalities may also assess a local income tax up to 1.0%).  In addition, business transactions are subject to a sales tax and use tax of 6%.   Michigan residents also pay higher property taxes compared to other states across the country.  Fortunately, Michigan law provides several tax breaks to seniors that can help minimize their personal income and property tax burdens:

Social Security Not Taxable: Any amounts paid in Social Security benefits are not included in gross income for Michigan tax purposes. MCL 206.30(1)(f)(iii).

State and Federal Public Retirement And Pension Benefits Not Taxable: Any amounts received from the following are not included in gross income for Michigan tax purposes:

  • Retirement or pension benefits received for services in the Armed Forces of the United States. MCL 206.30(1)(e)(i).
  • Retirement or pension benefits received under the Railroad Retirement Act. MCL 206.30(1)(e)(ii).
  • Beginning January 1st, 2012, retirement or pension benefits received for services in the Michigan National Guard. MCL 206.30(1)(e)(iii).
  • Retirement or pension benefits received from a federal public retirement system or from a public retirement system of or created by this state or a political subdivision of this state. MCL 206.30(1)(f)(i).
  • Retirement or pension benefits received from a public retirement system of or created by another state or any of its political subdivisions if the income tax laws of the other state permit a similar deduction or exemption or a reciprocal deduction or exemption of a retirement or pension benefit received from a public retirement system of or created by this state or any of the political subdivisions of this state. MCL 206.30(1)(f)(ii).

Private Retirement and Pension Benefits Partially Taxable: For pensions, retirement annuity payments, IRA distributions or other non-government retirement benefits, the following deductions apply:

  • Beginning on and after January 1, 2007, retirement or pension benefits (NOT deductible as Armed Forces, Railroad Retirement Act, Michigan National Guard or federal retirements system benefits) from any other retirement or pension system or benefits from a retirement annuity policy in which payments are made for life to a senior citizen, to a maximum of $42,240.00 for a single return and $84,480.00 for a joint return. The maximum amounts allowed shall be reduced by the amount of the deduction for retirement or pension benefits claimed Armed Forces, Railroad Retirement Act, Michigan National Guard or federal retirements system benefits and by the amount of a deduction claimed under MCL 206.30(1)(p). MCL 206.30(1)(f)(iv).
  • Beginning on and after January 1, 2007, a taxpayer who is a senior citizen may deduct to the extent included in adjusted gross income, interest, dividends, and capital gains received in the tax year not to exceed $9,420.00 for a single return and $18,840.00 for a joint return (adjusted annually for inflation). The maximum amounts allowed under this subdivision shall be reduced by the amount of Armed Forces, Railroad Retirement Act, Michigan National Guard or federal retirements system benefits received and any other retirement or pension benefits deductible under MCL 206.30(1)(f)(iv). MCL 206.30(1)(p). 

Personal Exemptions: In tax year 2019, taxpayers can claim a personal exemption of $4,400.00 each for themselves, their spouses and every dependent. MCL 206.30(2).

  • Taxpayers who are deaf, blind, hemiplegic, paraplegic, quadriplegic, or totally and permanently disabled may be able to take an additional exemption of $2,700.00 per qualifying individual. MCL 206.30(3)(a).
  • Qualified disabled veterans may take an additional $400.00 exemption. MCL 206.30(3)(b).  “Qualified disabled veterans” are those veterans who incurred or aggravated a disability in the line of duty in the active military, naval, or air service.

Standard Deductions: For persons born 1946 or later, the following standard deduction rules and restrictions apply:

  • For a person born from 1946 to 1952, the sum of the tax deductions for retirement or pension benefits is limited to $20,000.00 for a single return and $40,000.00 for a joint return. Upon reaching age 67, the limits on tax deductions for retirement or pension benefits no longer apply BUT he or she is eligible for a standard deduction of $20,000.00 for a single return and $40,000.00 for a joint return, which is deductible against ALL types of income (not restricted to income from retirement or pension benefits).  MCL 260.30(9)(b).
  • A taxpayer who takes the standard deduction of $20,000.00 (or $40,000.00 for a joint return) cannot deduct retirement or pension benefits received for services in the Armed Forces of the United States, retirement or pension benefits received under the Railroad Retirement Act, or, beginning January 1st, 2012, retirement or pension benefits received for services in the Michigan National Guard. In addition, a taxpayer taking the standard deduction cannot deduct Social Security income and cannot take personal exemptions.  MCL 260.30(9)(e).

Homestead Property Tax and Renters Credit: Regular claimants can receive a homestead property tax credit equal to 60% of the amount their property taxes exceed 3.2% of their income, up to $1,500. MCL 206.522(1)(a). This credit may be claimed regardless of whether or not a Michigan income tax return (form MI-1040) must be filed.

  • A person who rents bases his credit based on 20% of gross rent paid for tax years 2017 and 23% of gross rent paid for tax years 2018 and later. If the claimant rents a home subject to a service charge in lieu of ad valorum taxes, the percentage of gross rent used for the credit is 10%. MCL 206.520(2).
  • Senior citizens who have total household resources at or below $30,000.00 receive an additional 4% on top of the 60% of the amount by which either the percentage of gross rent (for renters) or property taxes (for owners) exceeds 3.5% of the claimant’s total household resources for tax years 2017 and earlier or 3.2% of the claimant’s total household resources for tax years 2018 and later for every $1,000.00 decrease in total household resources from $30,000.00 to a minimum of $21,000.00. MCL 206.522(b).
  • “A claimant who is a senior citizen with total household resources of $21,000.00 or less or a paraplegic, hemiplegic, or quadriplegic and for tax years that begin after December 31, 1999, a claimant who is totally and permanently disabled, deaf, or, for tax years that begin after December 31, 2012, blind is entitled to a credit against the state income tax liability for the amount by which the property taxes on the homestead, the credit for rental of the homestead, or a service charge in lieu of ad valorem taxes… for the tax year exceeds the percentage of the claimant’s total household resources for that tax year computed as follows (MCL 206.522(c)):”
      • 0% for total household resources not over $3,000.00.
      • 1% for total household resources over $3,000.00 but not over $4,000.00.
      • 2% for total household resources over $4,000.00 but not over $5,000.00.
      • 3% for total household resources over $5,000.00 but not over $6,000.00.
      • 5% for total household resources over $6,000.00 for tax years 2017 and earlier.
      • 2% for total household resources over $6,000.00 for tax years 2018 and later.
  • To qualify as a “senior citizen”, the applicant (or spouse) must reach age 65 by December 31 of the tax year, or be the unremarried survivor of a spouse who was 65 years or older at the time of death, and lived in Michigan for at least six months of the tax year.

Financial Hardship Property Tax Exemptions: Michigan law provides an exemption from property taxes for individuals who, in the sole judgment of the supervisor and board of review, are unable to wholly or partially contribute to public funds by reason of poverty. MCL 211.7u(1).  To be eligible for exemption, a person must comply with ALL of the following EACH TAX YEAR:

  • “Be an owner of and occupy as a principal residence the property for which an exemption is requested.” MCL 211.7u(2)(a).
  • “File a claim with the supervisor or board of review on a form provided by the local assessing unit, accompanied by federal and state income tax returns for all persons residing in the principal residence, including any property tax credit returns, filed in the immediately preceding year or in the current year. Federal and state income tax returns are not required for a person residing in the principal residence if that person was not required to file a federal or state income tax return in the tax year in which the exemption under this section is claimed or in the immediately preceding tax year. If a person was not required to file a federal or state income tax return in the tax year in which the exemption under this section is claimed or in the immediately preceding tax year, an affidavit in a form prescribed by the state tax commission may be accepted in place of the federal or state income tax return. The filing of a claim under this subsection constitutes an appearance before the board of review for the purpose of preserving the claimant’s right to appeal the decision of the board of review regarding the claim.”  MCL 211.7u(2)(b).
  • “Produce a valid driver’s license or other form of identification if requested by the supervisor or board of review.” MCL 211.7u(2)(c).
  • “Produce a deed, land contract, or other evidence of ownership of the property for which an exemption is requested if required by the supervisor or board of review.” MCL 211.7u(2)(d).
  • Meet the federal poverty guidelines updated annually by the U.S. Department of Health and Human Services, or alternative guidelines adopted by the governing body of the local assessing unit provided the alternative guidelines do not provide income eligibility requirements less than the federal guidelines. MCL 211.7u(2)(e).
  • “The application for an exemption under this section shall be filed after January 1 but before the day prior to the last day of the board of review.” MCL 211.7u(3).

Michigan is a tax-friendly place for seniors to retire and live because much of their income from Social Security, pensions or retirement accounts is either partially taxable or wholly exempt from taxation.  In addition, consulting with a knowledgeable tax professional may help you realize other deductions and credits available under the law to put more money back in your pocket.  If you or a loved one have any further questions about Michigan taxation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.

 

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