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Ugly Changes to Michigan Property Tax Credit

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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.

 

Changes (some scary) to Michigan’s Personal Income Tax

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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.