Michigan, like a majority of states, assesses an income tax like the federal government does. Unlike the Internal Revenue Code which provides a progressive tax rate based on income, Michigan assesses a flat income tax rate no matter how wealthy the taxpayer is. For tax years after October 1, 2012, the flat tax rate in Michigan is 4.25%. MCL 206.51(1)(b).
The flat tax rate is applicable against your “adjusted taxable income” as determined under Michigan law. Generally, what is considered income under the Internal Revenue Code is also considered income in Michigan (e.g. wages, salaries, tips, self-employment income from sole proprietorships and partnerships, dividends, etc.). However, there are significant additions and subtractions under Michigan’s income tax act that can make your taxable income much different than what appears on your federal tax return.
ADDITIONS AND SUBTRACTIONS TO TAXABLE INCOME
Those items ADDED into your income for Michigan taxation purposes include but are not limited to:
- Any gross interest and dividends from obligations or securities (e.g. savings bonds) issued by states other than Michigan or their political subdivisions.
- Any deductions for taxes on, or measured by, income on your federal tax return (e.g. self-employment tax deduction, your share of city income tax paid by partnerships and S-corps, or your share of taxes paid by an estate or trust).
- Any capital gains and losses claimed in the Michigan income portion on Form MI-1040D (Michigan Adjustments of Capital Gains and Losses) and Form MI-8949 (Michigan Sales and Other Dispositions of Capital Assets) attributed to gain/loss excluded from disposition of asset acquired prior to January 1, 1968 (treatment under MCL 208.271), sale or exchange of U.S. obligations that can’t be taxed in Michigan, or the sale or exchange of property in other states.
- Any losses claimed from a business or property in another state that you own as sole-proprietor, a partner in a partnership, a shareholder in a S-corporation, or a member of some other pass-through entity.
- Any net loss you claimed in the federal income portion on Form MI-1040D (Michigan Adjustments of Capital Gains and Losses) and Form MI-8949 (Michigan Sales and Other Dispositions of Capital Assets).
- Any gross expenses from the production of oil and gas or extraction of nonferrous metallic minerals subject to the Michigan severance tax to the extent you deducted them from your federal adjusted gross income.
- Any net operating loss deduction you claimed on your federal tax return against your adjusted gross income.
However, to the taxpayer’s benefit, those items that are SUBTRACTED from Michigan taxable income for the purposes of the flat income tax include but are not limited to:
- Income from U.S. government obligations (e.g. Series EE and I bonds, Treasury notes).
- Any amounts from pension or retirement benefits due to service in the U.S. Armed Forces or Michigan National Guard.
- Any amounts of pension or retirement benefits received under the Railroad Retirement Act.
- Any amounts of pension or retirement benefits received from a public retirement system of another state if that state permits a similar deduction or exemption of said benefits as under Michigan law.
- Any capital gains in the federal income portion of Form MI-1040D (Michigan Adjustments of Capital Gains and Losses) and Form MI-8949 (Michigan Sales and Other Dispositions of Capital Assets).
- Net business income earned in other states and net rents and royalties from real property or tangible personal property located or used in other states. However, Michigan residents cannot subtract salaries and wages or other compensation earned outside of the state (although they may be entitled to tax credit for income tax imposed by governments outside of Michigan).
- Taxable Social Security benefits and compensation received for active duty in the U.S. Armed Forces included in federal adjusted gross income.
- Michigan state and city income tax refunds and homestead property tax credits that were included in your federal adjusted gross income.
- Contributions to your Michigan Education Savings Program accounts (up to $5,000.00 for a single return, $10,000.00 for a joint return).
- Total contract price paid for a Michigan Education Trust prepaid tuition contract or the total charitable contribution to the Michigan Education Trust Charitable Tuition Program.
- Gross income subject to the Michigan severance tax from the Michigan production of oil and gas or extraction of nonferrous metallic minerals to the extend included in federal adjusted gross income.
Michigan’s income tax laws are extremely favorable to senior citizens. In addition to excluding Social Security benefits, military retirement and pension benefits, and federal/state public retirement and pension benefits, the following deductions apply to private pensions, retirement annuity payments, IRA distributions or other non-government retirement benefits:
- 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).
Most federal taxpayers who don’t itemize have the option to take a standard deduction of $12,550.00 for single or married filing separately filers, $25,100.00 for joint returns and $18,800.00 for head of household in tax year 2021 against their taxable income. There are additions to federal standard deductions if the taxpayer is a senior citizen, is blind, or both.
Michigan has a very limited standard deduction available for some residents born in 1946 or later. The following rules apply for taking a standard deduction against taxable Michigan income:
- 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).
In tax year 2021, taxpayers can claim a personal exemption of $4,900.00 each for themselves, their spouses and every dependent against their Michigan taxable income. MCL 206.30(2)(a)-(b). If the taxpayer has a certificate of stillbirth from the Michigan Department of Health and Human Services from that tax year, a personal exemption may be claimed for the stillborn child. MCL 206.30(2)(c). In additional, some taxpayers may be eligible for an additional personal exemption:
- Taxpayers who are deaf, blind, hemiplegic, paraplegic, quadriplegic, or totally and permanently disabled may be able to take an additional exemption of $2,800.00 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.
AVAILABLE TAX CREDITS
In addition to the deductions provided against taxable income, Michigan taxpayers can take advantage of a slew of tax credits available. Some of the more important tax credits include, but are not limited to:
- Michigan Homestead Property Tax Credit – Taxpayers may be able to obtain a tax credit to help pay for a portion of their property taxes if they are a qualified homeowner or renter and meet other statutory requirements such as certain income thresholds. Taxpayers can complete and file Form MI-1040CR and Form MI-1040CR-2 with the Michigan Department of Treasury.
- Michigan Farmland Preservation Tax Credit – Taxpayers receive a tax credit based on a share of the property tax paid on farmland as an incentive to keep the land as farmland and not develop it for another use. Taxpayers must complete and file Form MI-1040CR-5.
- Michigan Earned Income Tax Credit – Taxpayers who received the federal earned income tax credit can take 6% of the total as a refundable credit against the Michigan income tax assessed.
- Michigan Historic Preservation Tax Credit – Taxpayers who own eligible historic resources can lower their income tax owed by taking a refundable tax credit equal to 25% of the costs spent on qualified rehabilitation expenditures for work undertaken on the historic resource. Taxpayers must complete and file Form 3581 and submit with their individual income tax returns.
- Michigan Home Heating Credit – Taxpayers who meet certain income threshold amounts may be able to take a refundable tax credit against a percentage of home heating costs paid during the tax year. Taxpayers must complete and file Form MI-1040CR-7 with the Michigan Department of Treasury.
Michigan’s income tax laws can be complex and difficult to navigate. However, working with a skilled tax professional can help you realize significant savings by taking advantage of all the deductions and credits available. You could be leaving hundreds of dollars on the table by completing your taxes somewhere else.
If you have further questions about Michigan taxation or need other assistance, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.