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Pension & Retirement Benefits – 2012

Pension & Retirement Benefits – 2013
View 2011 and Prior Year Pension & Retirement Benefits Information

Beginning on January 1, 2012, pension and retirement benefits became subject to Michigan income tax for many recipients. Michigan law now requires the administrators of pension and retirement benefits to withhold income tax on distributions that are subject to tax.

What are “pension and retirement benefits”?

Under Michigan law, pension and retirement benefits include most payments that are reported on a 1099-R for federal tax purposes. This includes defined benefit pensions, IRA distributions and most payments from defined contribution plans. Pension and retirement benefits are generally taxable based on date of birth (see age groups below).
Regardless of date of birth, the following are not taxed:

  • US Military pensions
  • Michigan National Guard pensions
  • Social Security
  • Railroad benefits
  • Rollovers not included in the Federal Adjusted Gross Income (AGI)

Certain distributions reported on form 1099R are not pension or retirement benefits. Under Michigan law, these distributions are taxable deferred compensation. Taxable deferred compensation distributions include:

  • All distributions from 457 plans
  • Distributions from 401k or 403B plans sourced to employee contributions and the earnings from those contributions if the contributions were not matched by the employer.

Distributions that are premature under the terms of the retirement plan are always taxable regardless of the date of birth of the taxpayer. (See retirement code chart for 1099R below.)

For joint filers, the age of the oldest spouse determines the age category

Recipients born before 1946:

For 2012 you may subtract all qualifying pension and retirement benefits received from public sources, and may subtract private pension and retirement benefits up to $47,309 if single or married filing separately or up to $94,618 if married filing jointly. Withholding will only be necessary on taxable pension payments (private pension payments) that exceed the pension limits stated above for recipient born before 1946.

  • US Military pensions, Michigan National Guard pensions, Social Security & Railroad benefits continue to be exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Senior citizen subtraction for dividends, interest and capital gains is limited to $10,545 for single filers and $21,091 for joint filers, less any deductions for retirement benefits including US military and Michigan National Guard retirement benefits.

Recipients born between 1946 & 1952:

The first $20,000 for single or married filing separately or $40,000 for married filing jointly, of all private and public pension and annuity benefits may be subtracted from Michigan taxable income. Benefits in excess of these limits are taxable to Michigan.

  • Military pensions, Michigan National Guard pensions, Social Security & Railroad benefits continue to be exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Not eligible for the senior citizen subtraction for dividends, interest and capital gains.

Recipients born after 1952:

All pensions (private and public) and retirement benefits are taxable to Michigan.

  • US Military pensions, Michigan National Guard pensions, Social Security & Railroad benefits continue to be exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Not eligible for the senior citizen subtraction for dividends, interest and capital gains.

What are “Qualified Distributions”?

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 2012.

No.

9 - Cost of current life insurance protection

No.

Michigan and federal public pensions. Federal and Michigan public pensions are totally exempt for recipients born prior to 1/1/1946. Public pensions for recipients born on 1/1/1946 through 12/31/1952 are limited to $20,000 if single or married filing separately or $40,000 if married filing jointly in tax year 2012. Public pensions for recipients born after to 12/31/1952 are taxable. Public pensions can 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 are considered public pensions, however these pensions are not subject to limitation based on year of birth.

Public pensions from other states for Michigan residents born prior to 1/1/1946 should 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, should treat the pension as a private pension.

Public pensions from other states for Michigan residents born after 12/31/1945 will be subject to the pension limitation based on year of birth no matter which state the pension was received from.

Private Pensions. Private pension subtractions are limited to $47,309 if single or married filing separately or $94,618 if married filing jointly in tax year 2012 for recipients born prior to 1/1/1946 and $20,000 if single or married filing separately or $40,000 if married filing jointly in tax year 2012 for recipients born on 1/1/1946 through 12/31/1952. No subtraction is allowed for recipients born after 12/31/1952.

2012 Pension Deduction Estimator
 
Qualified Pension / Retirement Benefit(s) Received:

Do Not include Social Security, Military or Railroad Retirement Benefits here.


If the number of qualified pension benefits exceeds the number of fields, combine all public benefits together in one field and combine all private benefits together in another field.
 
Your Results:
  

If you make additional changes after clicking on the submit button, you must click on the submit button again for changes to take effect

Please remember to a copy of this screen once your estimation is complete. Keep this copy with your tax records/documentation for the appropriate year. Do not use the "Printer Friendly" version as it will delete all figures from your estimation results.

Qualifying public benefits include distributions from the following sources:
  • The State of Michigan
  • Michigan local governmental units
    (e.g., Michigan counties, cities, and school districts)
  • Federal civil service

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.


Individuals born prior to 1946 (or the unremarried surviving spouse of someone born before 1946 who was at least age 65 at the time of death) may subtract dividends, interest and capital gains. The subtraction is limited to $10,545 for single filers and to $21,091 for joint filers for 2012. These limits must be reduced by any pension subtraction taken.

Dividends / Interest Examples

1. Example:

An individual filing a single return with $5,000 pension subtraction is only allowed an interest subtraction of $5,545 ($10,545 - 5,000 = $5,545).

Mary was born in 1942 and has pension of $5,000 and interest income of $6,000.

Maximum interest subtraction
Less pension subtraction
Allowable interest subtraction
$10,545
- 5,000
$5,545

2. Example:

An individual filing a joint return with $90,240 pension subtraction is not allowed an interest subtraction because the pension amount is more than the allowable subtraction of interest ($21,091).

Larry & Lucy, born in 1939 and 1941, filing a joint return, have pension income of $90,240 and interest income of $15,201.

Maximum interest subtraction
Less pension subtraction
Allowable interest subtraction
$21,091
- 90,240
$0
Dividends/Interest/Capital Gain Estimator
Note: If you are the unremarried surviving spouse of someone born before 1946 who was at least age 65 at the time of death, enter your deceased spouse's year of birth.
Your Results:

Please remember to a copy of this screen once your estimation is complete. Keep this copy with your tax records/documentation for the appropriate year. Do not use the "Printer Friendly" version as it will delete all figures from your estimation results.

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.