The tax changes adopted by Gov. Snyder and the Michigan Legislature in 2011 will begin to take effect in 2012, and must be reflected in tax returns filed in 2013. Overall, under current law, taxes on businesses will be reduced by $1.6 billion, while individual income taxes will increase by $1.4 billion. Low-income families and seniors will face the most significant changes, in large part because of the loss of, or reductions in, a number of individual income tax exemptions, credits or deductions.
Some of the important changes for low- and moderate-income taxpayers include:
- Beginning Oct. 1, 2012, the personal income tax rate will be reduced from 4.35% to 4.25%. Consequently, the 2012 annualized rate is 4.33%, which applies to all 2012 income regardless of when it was received.
- Beginning in tax year 2013, the rate is reduced to 4.25% and is frozen at that level in subsequent years (eliminating previously scheduled annual reductions of 0.1% until the rate fell to 3.9% in 2015).
- The personal exemption is increased from $3,700 to $3,763 for 2012. The exemption is $3,900 in 2013.
- The $600 exemption for children ages 18 and under is no longer allowed.
- Special exemptions for seniors are no longer allowed, although special exemptions for taxpayers who are totally or permanently disabled and disabled veterans remain unchanged.
- Special exemptions for unemployment compensation greater than 50% of adjusted gross income (AGI) are no longer allowed.
- Pension and retirement income exclusions are changed and now depend on the taxpayer’s date of birth. For more details, see the Department of Treasury’s summary of retirement benefit changes.
Non-refundable Tax Credits
- The credit for city income taxes is no longer allowed.
- Credits for a range of contributions are no longer allowed, including:
- Public contributions to Michigan college foundations, universities, public broadcast stations, public libraries, state museums, etc.
- Contributions to homeless shelters, food banks and community foundations, including automobiles donated to charitable organizations.
- Contributions to medical savings accounts.
- Contributions to Individual or Family Development Accounts.
- The credit for college tuition and fees is no longer allowed.
Refundable Tax Credits
- The Earned Income Tax Credit (EITC) is reduced from 20% of the federal credit to 6%.
- The Homestead Property Tax Credit is revised, including the following major changes:
- The credit is not available for homes with taxable values of more than $135,000 (cap does not apply to rented homesteads). The maximum credit is still $1,200.
- The credit is based on total household resources rather than income. Total household resources include all income received by all household members during the year, including income that might be exempt from federal adjusted gross income.
- Seniors with total family resources of $21,000 or less can receive a credit equal to 100% of property taxes paid that exceed 3.5% of total household resources. The credit is reduced by 4% for each additional $1,000 in total household resources until $30,000. Seniors with total family resources of between $30,000 and $41,000 can receive 60% of taxes paid in excess of 3.5% of total household resources. Credits are reduced by 10% for each additional $1,000 in total household resources until $50,000.
- Taxpayers other than seniors can receive a credit for 60% of property taxes paid that exceed 3.5% of total household resources that are $41,000 or less. Credits are reduced by 10% for each additional $1,000 in total household resources until $50,000.
- Eligible disabled taxpayers continue to receive the full credit (100% of property taxes in excess of 0 to 3.5% of total household resources) if total household resources are $41,000 or less, with the credit phasing out at $50,000.
- Credits for adoption expenses and stillbirths are no longer allowed.
Source: Adapted from Income Tax Changes for Individuals and Trusts Effective Tax Year 2012 (For Returns Filed in 2013), Michigan Department of Treasury.