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2018 Retirement & Pension Information

2018 Retirement & Pension Information

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2018 Retirement & Pension Benefits Chart

 

 

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

 

Dividends/Interest/Capital Gain Deduction Estimator

What are retirement and pension benefits?

Under Michigan law, retirement and pension 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. Retirement and pension benefits are 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)

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 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.)

For qualifying distributions, there may be a limitation on the amount of the exemption that can be claimed.

What Distributions Do Not Qualify for a Subtraction?

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

  • All distributions from 457 plans
  • Distributions from 401(k) or 403(b) plans sourced to employee contributions and the earnings from those contributions if they were not matched by the employer.
  • Early distributions under the terms of the retirement plan are always taxable regardless of the date of birth of the taxpayer. (See retirement code chart for 1099-R below.)

NOTE: When considering your pension subtraction, 'surviving spouse' means the deceased spouse died prior to the current tax year (e.g., when filing a 2018 return the spouse died in 2017). Deceased spouse benefits do not include benefits from a spouse who died in 2018. If you or your spouse received pension benefits from a deceased spouse, see Form 4884, Michigan Pension Schedule instructions.

Form 1099-R Distribution Codes

Qualification for a subtraction is a two-step process. Use the distribution chart to determine whether your retirement and/or pension benefits qualify as a subtraction (step one). Then use the appropriate age category (step two). You must meet both qualification requirements in order to be eligible for a retirement and/or pension benefits subtraction.

If you do not qualify based on the distribution chart in step one, then you do not have a qualified subtraction and step two is not applicable.

Form 1099-R reports the total retirement and pension benefits you received during the year. Please refer to box 7 on Form(s) 1099-R for the distribution code(s) that describes the condition under which the retirement or pension benefit was paid. This chart lists distribution codes and describes eligibility of benefits for subtraction based on each code. Some exceptions exist. If your distribution code is not included in the list below or if you have questions on eligibility of your benefits, please consult your tax professional.

Form 1099-R Distribution Codes
Form 1099-R Distribution Codes Does the code indicate the distribution is eligible for a Michigan retirement and pension subtraction?
(Limited based on age and year of birth)
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;
Early retirement under the terms of the plan.
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 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.
Exception: You may not subtract distributions from a plan that:
  • allows the employee to set the amount of compensation to be deferred
  • does not prescribe the retirement age or years of service
8 - Excess contribution plus earnings/excess deferrals (and/or earnings) taxable in 2018. No.
9 - Cost of current life insurance protection. No.

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

Recipients born before 1946:

For 2018 you may subtract all qualifying retirement and pension benefits received from public sources, and may subtract private retirement and pension benefits up to $51,570 if single or married filing separately or up to $103,140 if married filing jointly. Private subtraction limits must be reduced by public benefits subtracted. Withholding will only be necessary on taxable pension payments (private pension payments) that exceed the pension limits stated above for recipient born before 1946.

  • Complete Form 4884, Michigan Pension Schedule.
  • Military pensions, Michigan National Guard pensions and Railroad Retirement benefits are entered on Schedule 1, line 11. These continue to be exempt from tax. They must be reported on Schedule W Table 2, even if no Michigan tax was withheld.
  • Social Security benefits included in your adjusted gross income are entered on Schedule 1, line 14 and are exempt from tax.
  • Public pensions can include benefits received from the federal civil service, State of Michigan public retirement systems and political subdivisions of Michigan.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.
  • Subtraction for dividends, interest, and capital gains is limited to $11,495 for single filers and $22,991 for joint filers, less any subtractions for retirement benefits including US military, Michigan National Guard, and railroad retirement benefits.

Note:  If you were born prior to January 1, 1946 and you receive a public pension(s) from a state other than Michigan , you 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 should treat the pension as a private pension.

Recipients born during the period January 1, 1946 through January 1, 1952:

If the older of you or your spouse (if married filing jointly) was born during the period January 1, 1946 through January 1, 1952, and reached the age of 67 on or before December 31, 2018, you are eligible for a deduction against all income and will no longer deduct retirement and pension benefits. Complete Schedule 1, line 24 instead of Michigan Pension Schedule, Form 4884.

The deduction is $20,000 for a return filed as single or married, filing separately, or $40,000 for a return filed as married, filing jointly. If you checked either SSA Exempt box 23C or 23F from Schedule 1, your deduction is increased by $15,000. If you checked both boxes 23C and 23F your deduction is increased by $30,000.

The standard deduction is reduced by military pay (included on Schedule 1, line 14), military and/or railroad retirement benefits (both reported on Schedule 1, line 11)

Recipients born after January 1, 1952 through December 31, 1952:

You may subtract 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. If you checked either SSA Exempt box 23C or 23F from Schedule 1, your subtraction is increased by $15,000. If you checked both boxes 23C and 23F your subtraction is increased by $30,000. Benefits in excess of these limits are taxable to Michigan.

  • Complete Form 4884, Michigan Pension Schedule.
  • Military pensions, Michigan National Guard pensions and Railroad Retirement benefits are entered on Schedule 1, line 11. These continue to be exempt from tax. They must be reported on Schedule W Table 2, even if no Michigan tax was withheld.
  • Social Security benefits included in your adjusted gross income are entered on Schedule 1, line 14 and are exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.

Recipients born after 1952:

All retirement (private and public) and pension benefits are taxable to Michigan, unless one of following applies:

  • The older of you or your spouse (if married filing jointly) was born on or after January 1, 1953 but before January 2, 1957, have reached age 62 and receive Social Security exempt retirement benefits due to employment with a governmental agency. You may be eligible for a retirement and pension subtraction of $15,000. If both spouses on a joint return qualify, the maximum subtraction increases to $30,000.
  • The older of you or your spouse (if married filing jointly) was born on or after January 1, 1953, received retirement benefits from SSA exempt employment, and were retired as of January 1, 2013. You may subtract up to $35,000 in qualifying retirement and pension benefits if single or married filing separately or $55,000 if married filing a joint return. If both spouses on a joint return qualify, the maximum subtraction increases to $70,000.

  • You are receiving retirement and pension benefits from a deceased spouse who was born prior to January 1, 1953. (Payments made to a surviving spouse can only be subtracted if the employee qualified for the subtraction at the time of death) When completing Form 4884, Michigan Pension Schedule, only include the deceased spouse's benefits.

Nontaxable benefits:

  • Military pensions, Michigan National Guard pensions and Railroad Retirement benefits are entered on Schedule 1, line 11. These continue to be exempt from tax. They must be reported on Schedule W Table 2, even if no Michigan tax was withheld.
  • Social Security benefits included in your adjusted gross income are entered on Schedule 1, line 14 and are exempt from tax.
  • Rollovers not included in the Federal Adjusted Gross Income (AGI) will not be taxed in Michigan.

Dividends/Interest/Capital Gain Deduction

Senior Citizens born before 1946 (or the unremarried surviving spouse for 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 $11,495 for single filers and to $22,991 for joint filers for 2018. These limits must be reduced by any pension subtraction taken.

Dividends / Interest Examples

1. Example:

Senior Citizen filing a single return with $5,000 pension subtraction is only allowed an interest subtraction of $6,495 ($11,495 - $5,000 = $6,495).

Mary is 70 years old and has pension of $5,000 and interest income of $7,000.

Maximum interest subtraction
Less pension subtraction
Allowable interest subtraction
$11,495
- 5,000
$6,495
 
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 ($22,991).

Larry & Lucy Smiles are 70 years old and have pension of $90,240 and interest income of $15,229.

Maximum interest subtraction
Less pension subtraction
Allowable interest subtraction
$22,991
- 90,240
$0
2018 Pension Deduction Estimator -
 
 
Deductions for Retirement Benefits:
Military retirement benefits due to service in the U.S. Armed Forces or Michigan National Guard or taxable railroad retirement benefits included in AGI.
 
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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.

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