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.