Contributed by: Laurie Renchik, CFP®, MBA
In the three years since Michigan’s Pension Tax was enacted, many more baby boomers have reached retirement age and started to tap into their pensions. It’s no secret that tax law is complex and we are not surprised that Michigan retirees have plenty of questions when it comes to the MI pension tax rules. Even though the pension tax for Michigan retirees was enacted back in 2012, the subject continues to generate interest from retirees and pre-retirees alike.
The rules for retirees vary based on age:
Tier 1: You were born before 1946
Tier 2: You were born between 1946 and 1952
Tier 3: You were born after 1952
Special Note: For joint returns, the age of the oldest spouse determines the age category that will apply to the pension and retirement benefits of both spouses, regardless of the age of the younger spouse.
Taxpayers born before 1946
If you were born before 1946, there is no change in the income taxes for your pension income. This means your social security income is exempt and so is income from public pensions. You don’t pay taxes on the first $49,027 ($98,054 if you’re married and filing jointly) from private pensions. You also get a senior citizen (over age 69) subtraction for interest, dividends and capital gains.
Taxpayers born between 1946 and 1952
If you were born between 1946 and 1952, your social security income is exempt and so is income from railroad and military pensions. You don’t get a senior citizen subtraction for interest, dividends and capital gains. Before age 67, you don’t pay taxes on the first $20,000 ($40,000 if you’re married and filing jointly) from private or public pensions. After age 67, you can subtract $20,000 ($40,000 if you’re married and filing jointly) from the amount you’ll pay taxes on unless you take the income tax exemption on military or railroad pensions.
Taxpayers born after 1952
If you were born after 1952, your social security income is exempt and so is income from railroad and military pensions. You don’t get a senior citizen subtraction for interest, dividends and capital gains. Before age 67, you are not eligible for any subtractions from your income from private or public pensions. After age 67, you can choose to continue to have social security and railroad or military income exempt or you can choose to subtract $20,000 ($40,000 if married and filing jointly) from the amount you’ll pay taxes on. If you choose to keep your social security and railroad or military income exempt, then you can claim a personal exemption.
If you need help sorting through the pension guidelines, please give us a call or email me at laurie.renchik@centerfinplan.com.
Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.
Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Laurie Renchik, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.