Ugly Changes to Michigan Property Tax Credit
The Michigan Homestead Property Tax Credit will be subject to new rules beginning in 2012. This post will review the old rules, then explain how the new rules are different.
Review of Old Rules (Prior to 2012)
A Michigan resident who paid property tax or rent on a Michigan homestead could claim a refundable property tax credit against Michigan income tax. A claimant must have been domiciled in Michigan for at least six months during the tax year and must occupy the dwelling. The credit is based on property taxes that were billed (whether or not paid) for the taxable year. For renters, 20% of rent paid is considered property taxes eligible for the credit.
For non-senior citizens, the credit is 60% of the amount by which the property tax for the year exceeds 3.5% of household income. For senior citizens and certain disabled individuals, the 3.5% threshold is reduced for those with household income under $6,000.
Household income means all income received by all persons of a household in a tax year while members of a household. Household income includes several items that are nontaxable such as child support, Social Security income, veterans’ disability benefits, etc. Household income is reduced by business and rental losses. Household income is also reduced by medical insurance premiums. When Household income exceeds $82,650, the credit is no longer available.
The New Rules (effective January 1, 2012)
The property tax credit is now available only for homes with a taxable value of less than $135,000 (this is roughly equal to a home with a sales price of $270,000).
Household income is replaced by household resources. The difference is that household resources is not reduced by business or rental losses.
Example: Joan has $90,000 in wages during 2011 and has rental losses of $20,000. Her household income is $70,000 ($90,000 in wages minus $20,000 in rental losses). Since her household income during 2011 is less than the limit of $82,650 she is eligible for the property tax credit. In 2012, her household resources are $90,000 (which is not reduced by her rental losses). Since her household resources are over the household resources limit, she is NOT eligible for the property tax credit.
For non-seniors, the credit is 60% of the amount by which the property tax for the year exceeds 3.5% of household resources.
For seniors with household resources under $21,000, the credit is equal to 100% of the property tax for the year that exceed 3.5% of household resources. The 100% amount is reduced by 4% for each $1,000 in additional household resources over $21,000 until $30,000 in household resources is reached.
Example: John has household resources of $22,000. His property tax credit is 96% of property taxes that exceed 3.5% of his household resources (100% minus [($22,000 minus $21,000) divided by 1,000 times 4%].
Senior claimants with household resources of $30,000 to $41,000 receive 60% of the credit.
For all claimants, there is a credit phaseout that begins at $41,000 of household resources. The phaseout equals 10% for each $1,000 increase in household resources between $41,000 and $50,000. At $50,000 of household resources, the credit is completely phased out. This is a very significant decrease in the phaseout amount from 2011 ($82,650).
Example: It is 2012. Terry (who is not a senior citizen) has $45,000 in household resources. He was billed $4,000 in property taxes. Terry property tax credit is 60% of his property taxes in excess of 3.5% of his household resources. His property tax credit before phaseout is $225 calculated as follows:
60% of property taxes of $4,000 = $2,400
Less: 3% of household resources = $1,575 ($45,000 times 3.5%)
Tentative property tax credit = $ 825 ($2,400 less $1,575)
Less: Phaseout = $ 412.50 The phaseout is 50% calculated as ([$45000-$40,000] divided by 1,000 times 10%)
Property Tax Credit = $ 412.50 ($825 minus $412.50 phaseout)
Example: Same facts as the last example except it is 2011. Terry would be entitled to an $825 property tax credit. Since his household income is less than $82,650, he still qualifies for the full property tax credit.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
Michigan Pension Tax-Updated
Historically, Michigan allowed an exemption for pension income. For those with private pensions (e.g., 401k plan from GM or an Individual Retirement Account), the State allowed a $45,842 exemption in 2011 ($91,684 for joint filers) from taxable income. For public pensions (i.e., government pensions), the exemption was unlimited—there was no tax on public pension income regardless of amount.
While the pension tax was working its way through the legislative process, the original plan was to subject seniors’ entire pension income to Michigan’s 4.35% income tax. This caused a bit of a stir. The pension tax, in its final form, applies different tax rules to three brackets.
The brackets are:
- Those born before 1946
- Those born between 1946 and 1952
- Those born after 1952
On a joint return, it is the year of birth of the older spouse that controls the tax treatment of both spouses’ pensions.
BORN BEFORE 1946
Those born before 1946 will see no change in how their pension income is taxed. For 2012, private pension income up to $47,309 is exempt for single filers and $94,618 for joint filers. Public pensions are exempt regardless of amount. Social Security income is fully exempt from Michigan tax. Seems simple so far, but wait…
BORN BETWEEN 1946 AND 1952
Phase 1: Before the Taxpayer Reaches Age 67
If a taxpayer is born between 1946 and 1952 and is under 67 years old, the exemption amounts are changed to $20,000 for a single return and $40,000 for a joint return regardless of whether the income is from a private or public pension. Social Security income is exempt. Railroad pension income is exempt. Military pension income is exempt.
Phase 2: After the Taxpayer Reaches Age 67
If a taxpayer is born between 1946 and 1952 and is 67 years old or older, the exemption amounts remain at $20,000/$40,000 but apply to both pension and non-pension income. This provision helps seniors with low pension income because they now have a large exemption that can apply to non-pension income such as wages or business profit.
Social Security income is fully exempt from Michigan tax. Social Security income recipients are still eligible to use the $20,000/$40,000 exemption amounts to other types of income.
Recipients of railroad pension income and military pension income have a choice. They can either:
- take an unlimited tax exemption for railroad pension income or military pension income OR
- claim the $20,000/$40,000 exemption amounts
When the law originally passed, the $20,000/$40,000 exemption amounts were completely phased out if Household Resources exceed $75,000 on a single return or $150,000 on a joint return. However, this phaseout has been ruled unconstitutional by the Michigan Supreme Court because it constitutes a graduated tax. Michigan’s Constitution requires the state to have a flat income tax.
Born after 1952
Phase 1: Before the Taxpayer Reaches Age 67
If a taxpayer is born after 1952 and is under 67 years old, the new law eliminates any exemption of private or public pension. Social Security income, Railroad Pension income, and Military pension income are still exempt from Michigan tax. There is no $20,000/$40,000 exemption available to offset any form of income.
Phase 2: After the Taxpayer Reaches Age 67
If a taxpayer is born after 1952 and is 67 years old or older, the new law allows the $20,000/$40,000 exemption for ALL types of income—public and private pensions, non-retirement income, and Social Security income.
Under this provision, Social Security income, Railroad Pension income, and Military Pension income has to be sheltered by the $20,000/$40,000 exemption amounts.
ALTERNATIVELY: taxpayers may elect to waive the $20,000/$40,000 exemption amounts and instead claim an unlimited exemption for Social Security income, Railroad Pension income, and Military Pension income.
Example: It is 2020, John is 67 years old and he was born in 1953. John has $15,000 in Social Security Income and $30,000 in private pension income. John is married so he is entitled to a $40,000 exemption. John must use $15,000 of his exemption to shelter his Social Security income. John has a $25,000 remaining exemption to shelter his $30,000 pension income. John will pay tax on the remaining $5,000 pension income.
Under the alternative, John would waive the $40,000 exemption amount and fully exempt his Social Security income. However, this would increase John’s taxes. His Social Security income of $15,000 would be exempt, but he must now pay tax on his $30,000 private pension income.
Basically, taxpayers would be better off claiming the $20,000/$40,000 exemption unless their Social Security income, Military Pension income, and Railroad Pension income are greater than the $20,000/$40,000 exemption amount.
If John was born in 1952, his Social Security income would be exempt from tax without having to use his $40,000 exemption. Thus, his full $40,000 exemption would fully shelter his $30,000 pension income.
Tax simplification!!!
Stay tuned for more updates.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
How to Avoid the 10% Penalty on Early Retirement Account Distributions
One issue with investing money in a 401k or IRA is that you generally cannot access the funds until you reach age 59½. If you withdraw funds from these retirement accounts before that age, you will be subject to a 10% penalty on the amount distributed. This penalty is in addition to the federal and state income taxes you’ll pay on the distribution.
Fortunately, the IRS will waive the 10% penalty in certain circumstances. However, even if you meet one of these exceptions, you’ll still have to pay federal and state income taxes on the distribution even if the 10% penalty is waived.
The exceptions are:
- Distributed funds that are rolled over into an IRA or other qualified plan
- Distributions upon death or disability of the account owner
- Distributions that are part of a series of substantially equal periods payments over the life of the account owner or the joint lives of the participant and beneficiary
- Translated into English: when you have a balance in a retirement account, you can calculate an annuity based on the amount in the account payable over your life expectancy (there are a few ways to calculate this annuity). These annuity payments are exempt from the 10% penalty. The annuity has to last through the later of:
- When the account owner turns 59½
- Five years after the date annuity payments began
- Translated into English: when you have a balance in a retirement account, you can calculate an annuity based on the amount in the account payable over your life expectancy (there are a few ways to calculate this annuity). These annuity payments are exempt from the 10% penalty. The annuity has to last through the later of:
- Distributions after the participant’s separation from service (i.e., quitting/laid off/fired), provided the separation from service occurred during or after the year the participant reached age 55 (or age 50 for government plans to a retired police officer, firefighter, or emergency medical services provider).
- This exception applies only to qualified plans, it does NOT apply to IRAs
- Distributions to a former spouse under a Qualified Domestic Relations Order (QDRO)
- Pension benefits are often divided during divorce. To properly comply with pension plan rules, retirement accounts can only be split up pursuant to a QDRO. Otherwise, the plan will have made a disallowed distribution to a nonparticipant. This could jeopardize the tax-advantaged status of the pension plan.
- Once a retirement account has been divided pursuant to a QDRO, the nonparticipant spouse can receive distributions without incurring the 10% penalty. However, the nonparticipant spouse is still subject to the pension plan rules and isn’t entitled to any type or form of benefits that aren’t available in the plan.
- IRAs do not require QDROs to be divided in divorce. The division of the IRA does not cause a distribution; however, amounts withdrawn from the IRAs by either spouse will not be exempt from the 10% penalty if it is a disqualifying distribution.
- Distributions to the extent of deductible medical expenses
- Medical expenses are reduced by 7.5% of adjusted gross income to arrive at deductible medical expenses. Early distributions equal to this amount can be distributed free of penalty.
- Distributions made on account of the IRS’ levy of retirement accounts
The following exceptions apply only for IRAs:
- Distributions equal to medical insurance premiums for workers who have received federal or state unemployment benefits for 12 consecutive weeks. The reduction for 7.5% of adjusted gross income does not apply.
- Distributions used to pay for qualified higher education expenses (college) for the account owner, owner’s spouse or child/grandchild.
- Distributions up to $10,000 for first time homebuyers.
- “First time” doesn’t literally mean “first time.”
- First time homebuyer is defined as not having an ownership interest in a principal residence during the two year period ending on the date the new home is acquired
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230..
Changes to Federal and Michigan Unemployment Taxes for 2012
There have been a number of changes to federal and state unemployment taxes over the past year. This post will describe some of those changes.
Federal Unemployment Tax
As you may have noticed on your Form 940 (Federal Unemployment Tax) for 2011, there were two federal unemployment tax rates during 2011. A 0.8% rate applied to wages through June 30, and a 0.6% rate applied to wages paid from July 1 to December 31. This 0. 2% FUTA tax reduction was due to the repeal of the FUTA surchage. The 0.2% surcharge was originally added to the FUTA tax rate in 1976 to shore up the federal unemployment tax system. The surcharge is not tied to unemployment benefits workers receive, so the elimination of the surcharge will not affect unemployment benefits. The FUTA tax rate for 2012 remains at the lower 0.6% FUTA tax rate.
State Unemployment Tax
As of last year, the State of Michigan owed $3.267 billion to the federal government to finance unemployment tax payments to the unemployed. To help pay off this federal debt, the State imposed a 0.75% increase in state unemployment taxes. Additionally, when a state is unable to repay federal debt used to finance unemployment benefits, businesses located within that state have to pay a higher FUTA tax rate. Since Michigan was one of those states in 2011, it had to pay an additional 0.9% FUTA tax rate. This 0.9% rate was in addition to the 0.8% and 0.6% tax rates explained above.
The 0.75% Michigan solvency tax was insufficient to repay the federal debt. As a result, the State of Michigan issued $3.323 billion in bonds in December 2011 to repay the federal debt. Since the federal debt is now repaid, the additional 0.9% FUTA rate will no longer apply in 2012. Additionally, the 0.75% Michigan solvency is also repealed. However, the Michigan solvency tax has been replaced with an Obligation Assessment which will be used to repay the Michigan bonds that were used to repay the federal debt. This Obligation Assessment will be an increase to your state unemployment tax rate beginning in 2012. In Michigan, 100% of unemployment insurance is employer-funded, so Michigan employers will be responsible to repay the bond issue. The Obligation Assessment is based on your current state unemployment tax rate and will be roughly one-half to three-quarters of a percent. Bottom line: the Obligation Assessment will be roughly equal to the state Solvency Tax, but employers are slightly better off because the additional 0.9% FUTA tax rate will no longer apply.
There are other changes (i.e., tax increases) to Michigan unemployment taxes as a result of the bond issue:
- the tax base is increased from $9,000 to $9,500 (In 2011 employers paid state unemployment taxes on the first $9,000 of wages. Starting in 2012, employers will pay state unemployment taxes on the first $9,500 of wages.) However, if the state Unemployment Trust Fund reaches a certain surplus amount, the tax based will be lowered to $9,000.
- The part of your unemployment tax rate that is based on your employees’ unemployment claims is changing. Prior to 2012, the tax rate was based on the past 5 years of unemployment claims. In 2012, the unemployment claims experience component of your tax rate will be based on 4 years of unemployment claims and in 2013, 3 years of unemployment claims.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
Employers Will Have to Hang Posters Advising Employees of Union Rights
The National Labor Relations Board (NRLB) issued a rule requiring employers to hang posters in their businesses advising employees of their rights under the National Labor Relations Act. Basically, as a business owner you’ll have to hang a poster in your business advising employees of their rights to unionize. A copy of the poster can be found here. The NRLB originally required employers to hang these posters on January 31, 2012, but there are court challenges to this requirement. The NRLB has postponed the poster requirement until April 30, 2012.
The NRLB believes it has established standards for asserting jurisdiction over the great majority of non-government employers with a workplace in the United States. Some examples of when a business is subject to this NRLB poster requirement include:
- Retailers if they have a gross annual volume of business of $500,000 or more. Retailers include apartment buildings, home builders, restaurants, tax services.
- Shopping centers and office buildings have a lower threshold of $100,000
- For non-retailers, jurisdiction is based on the amount of goods and services provided by the employer out of state (outflow) or purchased by the employer from out of state (inflow). The NRLB has jurisdiction if the annual amount of inflow OR outflow is at least $50,000.
- Medical and dental offices, child care services, residential care centers with a gross annual volume of at least $250,000 are under NRLB jurisdiction
- Nursing homes have a threshold of $100,000
- Law firms have a threshold of $250,000.
Reporting Unclaimed Property
As a business owner, you’ve probably received a notice from the Michigan Department of Treasury advising you to report and turn over to the state any unclaimed property you have. Many businesses have unclaimed property resulting from normal operations. Some examples include uncashed payroll checks, uncashed vendor checks, credit balances on accounts receivable, etc. Any of these assets must be reported and turned over to the state if they remain unclaimed for a certain period of time. For example, uncashed payroll checks must be reported and turned over to the state after one year and uncashed vendor checks must be reported and turned over to the state after three years.
The due date for filing the unclaimed property annual report is July 1, 2012 for property reaching its dormancy period (e.g., one year for uncashed payroll checks) as of March 31, 2012.
Example: You issue two paychecks. The first paycheck is issued March 27, 2011 and the second is issued April 3, 2011. The March 27 paycheck is dormant for one year on March 31, 2012, and must be reported and turned over to the state by July 1, 2012. The second paycheck issued on April 3, 2011 has not been dormant for one year on March 31, 2012 and must not yet be reported. If this paycheck remains unclaimed on March 31, 2013, it must be reported and turned over by July 1, 2013.
Penalties for Not Filing or Turning over Unclaimed Property
Penalty and interest may be assessed as follows:
- interest at 1% over prime per month on the property or the value of the property from the date the property should have been paid and/or
- penalty at 25% of the value of the property that should have been paid
If the state audits a business for compliance with unclaimed property reporting, the state can go back 10 years. A concern is that the state is outsourcing its audit function to third party auditors who are paid on a contingency basis based on the amount of unclaimed property they find. Additionally, third party auditors may only audit a recent period, then extrapolate the value of any unreported unclaimed property over the ten years. This could result in substantial penalties and interest.
If You Don’t Have Unclaimed Property
If you are certain you don’t have unclaimed property to report and pay over, you can file Form 4305, Attestation of Compliance with Unclaimed Property Reporting, by January 31, 2012.
Voluntary Compliance Agreement
The state is providing businesses that have not previously reported or have underreported unclaimed property in the current and past four years with an opportunity to comply with the reporting and payment requirements by entering into a Voluntary Disclosure Program by filing Form 4869. The program will waive all penalty and interest on property voluntarily submitted to the state. The deadline to enter into this agreement is January 31, 2012.
Questions…
There is some uncertainty about whether the Department of Treasury has the authority to enter into these Voluntary Compliance Agreements or to require business to report when they DO NOT have unclaimed property. The State Bar of Michigan issued an email to its members this past week questioning the Department’s ability to impose these requirements. The State Bar issued a letter to the Department of Treasury regarding the uncertainty of these requirements. The State Bar has not yet heard back from the Department.
So…if you have any questions regarding this issue please feel free to contact us.
IRS Provides Relief in Employee vs. Independent Contractor Disputes
An issue that has been getting more attention from the IRS is worker classification. This issue deals with whether you treat people who provide services for your business as employees or as independent contractors. Generally, employers would rather treat service providers as independent contractors for the following reasons:
- employers do not have to pay payroll taxes on amounts paid to independent contractors
- employers do not have to provide employee benefits to independent contractors
- employers do not have to pay workers compensation premiums for independent contractors (assuming the independent contractor has her own workers compensation policy).
Whether a service provider is an employee or independent contractor depends on the amount of control the employer has over the service provider. A greater amount of control would tend to increase the likelihood that the service provider is an employee.
When an employer has been treating a service provider as an independent contractor, and the IRS later reclassifies the service provider as an employee, the employer will be liable for payroll taxes for the years at issue plus penalties and interest. This can be a substantial balance due.
Example: Over the past three years, ABC Corp has paid $600,000 to independent contractors. The IRS reclassifies the independent contractors as employees. ABC Corp is now liable for back payroll taxes of roughly $60,000 plus penalties and interest (which could amount to several thousand dollars more).
The Relief Provision
The IRS wants to encourage employers to voluntarily resolve their worker classification issues. The IRS recently added a program (the Voluntary Classification Settlement Program [VCSP]) that provides partial relief from federal payroll taxes for eligible employers who agree to prospectively treat service providers as employees.
A employer who participates in the VCSP will agree to prospectively treat the service providers as employees for future tax years. In exchange, the employer will pay 10% of the payroll tax liability that would have been due on amounts paid to independent contractors for the most recent year, determined under the reduced payroll tax rates (10.25% in 2011 and 10.68% in 2010).
The employer will not be liable for penalty or interest, and will not be subject to an workers classification audit for prior periods. However, the employer must agree to extend the period of limitations on assessments of employment taxes for three years for the first, second, and third years following the year the VCSP is approved.
Example: Same facts as in above example except that ABC enters into a VCSP in January 2012. ABC paid its service providers $200,000 in 2011. Under the VCSP, ABC owes $2,056 to the IRS. ABC will not be liable for penalties and interest. The $2,056 balance due is equal to the payments to service providers for the prior tax year of $200,000 multiplied by the reduced payroll tax rate of 10.25% times 10%. Under the VCSP, ABC is not liable for the payments to its service providers for 2009 and 2010. ABC will treat its service providers as employees beginning 2012.
To enter into a VCSP, the employer must:
- submit an application (Form 8952)
- have consistently treated the service providers as independent contractors
- have filed all Forms 1099 for the prior three years
- not be under IRS, Department of Labor, or state audit
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
It’s Not as Easy Being Green
The past few years, Congress has allowed tax credits for energy efficient home improvements. In 2009 and 2010, the tax credit for building envelope and qualified energy property (discussed below) was equal to 30% of qualifying expenses up to a $1,500 credit. Tax credits for alternative energy products (solar, wind, geothermal) were equal to 30% of such expenditures without limit.
Beginning January 1, 2011, Congress substantially reduced the amounts of such credits. This post will discuss two home energy efficiency tax credits:
- Credit for Nonbusiness Energy Property
- Credit for Residential Energy Efficient Property
Credit for Nonbusiness Energy Property
This credit equals the sum of:
- 10% of certain costs for property installed to improve the energy efficiency of existing homes (these costs are referred to as building envelope components)
- 100% of costs for residential energy property expenses (subject to dollar limitations for each specific type of property)
Building envelope components (10% credit) include:
- insulation
- exterior windows (including skylights)
- exterior doors
- certain metal and asphalt roofs designed to reduce heat gain
It is important to note that these credits only apply when such property is installed in your principal residence.
For building envelope components, the credit is allowed only for amounts paid to purchase the components (i.e., the credit is NOT allowed for onsite preparation, assembly, or original installation).
Residential energy property (100% credit) includes:
- electric heat pump water heaters (up to $300)
- electric heat pumps (up to $300)
- biomass fuel stoves (up to $300)
- high-efficiency central air conditioners (up to $300)
- natural gas, propane, or oil water heaters (up to $300)
- natural gas, propane, or oil furnaces or hot water boilers (up to $150)
- advanced main air circulating fans (used in natural gas, propane, or oil furnace) (up to $50)
The credit for qualified energy property is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.
In prior years, the credit was not subject to the $50 to $300 limits. The credit was equal to 30% of the expenses up to a $1,500 credit.
In 2011, there is a lifetime maximum nonbusiness energy property credit of $500 ($200 for exterior windows and skylights), taking into account all such credits allowed to the taxpayer for years ending after December 31, 2005. This limit includes credits for building envelope components and for residential energy property.
Credit for Residential Energy Efficient Property
Clear your mind of the above rules. This is a completely separate credit.
This credit is equal to 30% (without limit) of the cost of qualified:
- solar electric property
- solar water heating property
- fuel cell property
- small wind energy property
- geothermal heat pump property
The rule for this credit has not changed from prior years—the credit is still equal to 30% of the costs of such property without limit. This credit is allowed for amounts paid to purchase the property as well as for onsite preparation, assembly, or original installation.
This credit applies when the property is installed in your residence (the statute does not require it to be your principal residence). It is therefore possible that you can claim a credit for this credit on a vacation home (although it would be best to wait for IRS guidance on the issue).
Both the credit for nonbusiness energy property and credit for residential energy efficient property are nonrefundable credits that can be used to offset both regular tax and alternative minimum tax.
One final note—taxpayers may rely on written manufacturer certifications that the property is qualified for these credits.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
Changes (some scary) to Michigan’s Personal Income Tax
Our previous posts have described changes in Michigan tax law regarding pension income and business taxation. This post will highlight changes to Michigan’s personal income tax. These changes are generally effective January 1, 2012.
A list of the most relevant changes:
- Political contributions will no longer be deductible. Previously, Michigan allowed up to a $50 deduction for political contributions ($100 on a joint return)
- Senior citizens will no longer be able to exclude a portion of interest, dividends, and capital gains received.
- Taxpayers will no longer receive an additional $600 exemption per dependent child under age 19
- Charitable contributions from retirement accounts will no longer be deductible for Michigan tax purposes
- The additional exemption allowed for each taxpayer age 65 and older will be eliminated
There will also be substantial changes to the Homestead Property Tax Credit. This credit is based on the property taxes assessed against your principal residence and its maximum amount is $1,200. It is calculated as:
(Property Taxes Assessed – 3.5% of Household Income) * 60%
For senior citizens, the 60% at the end of the formula is increased to 100%.
The credit begins to phase out when Household Income exceeds about $73,000.
Changes to the Homestead Property Tax Credit:
- a taxpayer will no longer be eligible for the credit if the taxable value of her homestead exceeds $135,000 (for a new home, this limit equates to a sale value of $270,000)
- the credit will be phased out starting at $41,000 of household resources and will be completely phased out at household resources of $50,000
- the 60% and 100% applicable percentages for non-seniors and seniors will be eliminated. In its place will be an applicable percentage phase out based on household resources:
- Those with $21,000 of household resources and lower will have an applicable percentage of 100%
- The applicable percentage will phase out four percentage points for every $1,000 of household resources above $21,000.
- The minimum applicable percentage will be 60%.
Under prior law, the Homestead Property Tax Credit was based on household income. Under the new law, the credit will be based on household resources. The primary difference between the two concepts is that household resources would exclude any subtractions due to net business, rental, or royalty losses.
Example: John has W-2 income of $70,000 and a business loss of $30,000. His household income is $40,000. John pays property taxes of $2,000. Under old law, his property tax credit would be based on the amount of his property taxes exceeding 3.5% of household income. Subject to the applicable percentage, John property taxes eligible for the credit are $600 ($2,000 property taxes less $1,400 (which is 3.5% of household income of $40,000).
Under the new law, John’s household resources are $70,000 (household resources do not take into account business losses). 3.5% of his household resources is $2,450. Since John’s property taxes of $2,000 don’t exceed 3.5% of household resources, John cannot take the property tax credit.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230.
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