In 2012, Michigan tax law began to phase in tax increases to retirement income. The taxable benefits now depend on the retiree's age. Retirees born prior to 1946 should not experience significant changes to their Michigan tax liability. Retirees born after 1952 will see the greatest impact of these tax changes, and retirees born between 1946 and 1952 will see will see significantly reduced exemptions. The following briefly explains the new three-tier system:
- Taxpayers born prior to 1946 will continue to get the same tax breaks they have now. Public pensions will not be taxed. Income from private pensions, 401(k)s and IRAs will not be taxed on amounts up to $47,309 for single filers and $94,618 for joint filers.
- Taxpayers born between Jan. 1, 1946, and Dec. 31, 1952 will have all retirement income subject to tax, whether it's from a public or private pension, 401(k) or IRA. An income exclusion will be available for up to $20,000 for a single filer and up to $40,000 for joint filers.
- Taxpayers born after 1952 will see all retirement income taxed as regular income until they turn 67 (beginning in 2020), at which time they will qualify for an income exclusion of $20,000 for single filers and $40,000 for joint filers on all income, or deduct 100 percent of Social Security income and military and railroad pensions.
All three tiers avoid taxing Social Security income and military pensions. For couples, the age of the older spouse applies.