Pension and Retirement Income and Income Tax Liability
A subtraction is allowed on the Michigan return for qualifying distributions
from retirement plans. Retirement plans include private and public employer
plans, and individual plans such as IRA's. To be considered a qualified
distribution for the subtraction, several requirements must be met. For employer
plans, an employee generally must have retired under the provisions of the plan,
the pension benefits must be paid from a retirement trust fund, and the payment
must be made to either the employee or a surviving spouse. (Payments made to a
surviving spouse are only deductible if the employee qualified for the
subtraction at the time of death.)
- If the conditions were met, there may be a limitation on the amount of the
exemption that can be claimed.
- If you received a pension or retirement benefit payment, you also received
a Form 1099R. There is a box on Form 1099R titled "Distribution code(s)".
Look in the "Distribution code(s)" box for the number that
describes the condition under which the pension or retirement benefit was
paid.
This chart describes the distribution codes and their eligibility for
Michigan tax exemption.
|
Form 1099R Distribution Codes |
Is the condition eligible for Michigan
tax exemption?
(Dollar Limits may still apply) |
|
1 - Early distribution, no known exception. |
No.
|
|
2 - Early distribution, exception applies.
|
No, unless part of a series of
mainly equal periodic payments made for the life of the employee or the
joint lives of the employee and their beneficiary.
Distributions from a 457 plan (a kind of deferred
compensation plan) are not exempt. |
|
3 - Disability.
|
Yes. |
|
4 - Death. |
Yes, for surviving spouse only
and only if the decedent would have also qualified for a normal
distribution under Distribution Code 7 at the time of death.
No, for all other beneficiaries.
No, if paid as a death benefit
payment made by an employer but not made as part of a pension, profit
sharing, or retirement plan. |
|
5 - Prohibited transaction |
No. |
|
6 - Section 1035 exchange. the
exchange of life insurance, endowment insurance and annuity contracts
|
No.
|
7 - Normal distribution.
- normal distribution from a plan,
- distribution from a traditional IRA, if the
participant is at least 59½,
- Roth conversion if the participant is at least age
59½,
- distribution from a life insurance, annuity, or
endowment contract must be 65 and part of a series of mainly equal
periodic payments made for the life of the employee or the joint lives
of the employee and their beneficiary
|
Yes. |
| 8 - Excess contribution plus
earnings/excess deferrals (and/or earnings) taxable in 2007. |
No. |
| 9 - Cost of current life insurance
protection |
No. |
Michigan and federal public pensions. Federal and Michigan public pensions are totally exempt. Public pensions include benefits received from the federal civil service, State of Michigan public retirement systems and political subdivisions of Michigan, military retirement and Tier 2 railroad retirement. If the conditions of the plan under step one are met, then these payments are totally exempt from Michigan income tax.
Public pensions from other states. Michigan residents can treat the public pensions received from the following states as totally exempt: Alaska, Florida, Hawaii, Illinois, Massachusetts, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming because they do not tax Michigan Public Pensions.
Michigan residents who receive public pensions from states not listed above are subject to the private pension exemption limits.
Private Pensions. Private pension subtractions are limited to $42,240
on a single return and $84,480 on joint returns for tax year 2007.
Combined Private and Public Pension Distributions. If you received both public and private pension distributions then the maximum allowable subtraction exemption for the private pension must be reduced by the amount the combined pensions exceed any public pension amount.
|
Example #1
Mary has a public pension of $25,000 and a private
pension of $20,000.
Maximum private pension exemption subtraction
Less public pension |
$42,240
-25,000 |
Allowable private pension exemption
Plus public pension |
$17,240
+25,000 |
| Total pension subtraction allowed |
$42,240 |
|
Example #2
Bill has a public pension of $45,000 and a private
pension of $15,000
Maximum private pension exemption subtraction
Less public pension |
$42,240
-45,000 |
Allowable private pension exemption
Plus public pension |
$ -0-
+45,000 |
| Total pension subtraction allowed |
$45,000 |
|
Senior Citizens (aged 65 or older, or the surviving un-remarried spouse of a senior) may subtract interest, dividends and capital gains. The subtraction is limited to $9,420 for single filers and to $18,840 for joint filers for 2007. These limits must be reduced by any pension subtraction taken.
Example:
Senior Citizen filing a single return with $5,000 pension subtraction is only allowed an interest subtraction of $4,420 ($9,420 - 5,000 = $4,420).
Mary is 65 years old and has pension of $5,000 and interest income of $4,000.
| Maximum interest subtraction |
$9,420 |
| Less pension subtraction |
- 5,000 |
Allowable interest subtraction $4,420
DISCLAIMER:
This estimator provides an unofficial estimate and has no legal bearing on any future tax liability. Interactive estimators are made available to you as self-help tools for your independent use.
NOTE:The information you provide is anonymous and will only be used for purposes of this estimation. It will not be shared, stored or used in any other way, nor can it be used to identify the individual who enters it. It will be discarded when you exit this program.
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