Revenue Administrative Bulletin 2021-24

Part 1 of the Michigan Income Tax Act: The Retirement and Pension Benefits Deduction for a Surviving Spouse

Approved:   December 21, 2021

Pursuant to MCL 205.6a, a taxpayer may rely on a Revenue Administrative Bulletin issued by the Department of Treasury after September 30, 2006 and shall not be penalized for that reliance until the bulletin is revoked in writing. However, reliance by the taxpayer is limited to issues addressed in the bulletin for tax periods up to the effective date of an amendment to the law upon which the bulletin is based or for tax periods up to the date of a final order of a court of competent jurisdiction for which all rights of appeal have been exhausted or have expired that overrules or modifies the law upon which the bulletin is based.

RAB 2021-24.  This Revenue Administrative Bulletin (RAB) addresses changes to the deduction by a surviving spouse of retirement or pension benefits under Part 1 of the Michigan Income Tax Act (MITA) as amended by 2020 PA 65.

INTRODUCTION

The MITA provides a retirement or pension benefits deduction ("benefits deduction") for distributions from public and private retirement plans, retirement annuity plans, and retirement accounts such as individual retirement arrangements (IRAs).[1] The benefits deduction for private retirement and annuity plans and IRAs is generally subject to a maximum dollar amount.[2]

Beginning with tax year 2012, in addition to the maximum dollar amount, the MITA added limitations on the benefits deduction based on a taxpayer's date of birth.[3] For joint filers, the limitations are based on the date of birth of the oldest spouse. For single filers, the limitations are based on the date of birth of the filer. Prior to the enactment of 2020 PA 65, in the case of a surviving spouse ("survivor") who receives benefits derived from a deceased spouse ("decedent"), the Department interpreted the date of birth limitation to allow the survivor to claim a decedent-derived benefits deduction based on the date of birth of the decedent.

The Department's interpretation was generally codified into statute by 2020 PA 65. That is, the new law allows an un-remarried survivor to claim the greater of: (1) a benefits deduction based on the date of birth of the older spouse, if the couple had claimed the deduction on a joint return for the year of death, or (2) a standard deduction against all types of income of $20,000 based on the survivor's date of birth.

However, 2020 PA 65 also increased the benefits deduction for some survivors but decreased the benefits deduction for others. This RAB discusses the changes to the benefits deduction for survivors because of 2020 PA 65.

LAW AND ANALYSIS

 I.     "Retirement or pension benefits" defined for a survivor.

The MITA defines "retirement or pension benefits" to include the "retirement or pension benefits received by a surviving spouse if those benefits qualified for a deduction prior to the decedent's death."[4] Based on this definition, the survivor may claim decedent-derived benefits as "retirement or pension benefits."

II.     General limitations on retirement or pension benefits deduction based on date of birth.

Before addressing the effect of 2020 PA 65 on the applicable date of birth for determining the allowable benefits deduction, the date of birth limitations are briefly presented. The MITA limitations are divided into three tiers, with younger taxpayers generally receiving a smaller benefits deduction or no benefits deduction. For taxpayers other than those whose benefits are from employment with a governmental agency that was not covered by the federal Social Security Act ("SSA-exempt"), those tiers are as follows:

Tier 1: Taxpayers born before 1946 have no date of birth limitations; however, the maximum dollar amount continues to apply to private benefits.[5]

Tier 2: Taxpayers born in 1946 through 1952 were eligible for a reduced benefits deduction before turning 67; however, those taxpayers have now all reached age 67, so this deduction is no longer applicable. Most Tier 2 taxpayers may now claim a standard deduction of $20,000/single filer or $40,000/joint filers. The standard deduction applies against all types of income; however, under the statute, it may not be claimed if the taxpayer claims a deduction for any of the following: compensation, including retirement or pension benefits, from service in the Armed Forces of the United States, or retirement and pension benefits under the  Railroad Retirement Act or from service in the Michigan National Guard (“Military and Railroad income”).[6] To ensure taxpayers receive the maximum available benefit, the Department has designed its forms and instructions to treat the Military and Railroad income deduction as a reduction to the standard deduction. Thus, a taxpayer claiming the Military and Railroad income deduction will effectively receive the full benefit of the standard deduction if the standard deduction is larger.

Tier 3: Taxpayers born after 1952 have no benefits deduction. Most Tier 3 taxpayers may claim the $20,000/single filer or $40,000/joint filers standard deduction against all types of income upon reaching age 67. As with the Tier 2 standard deduction, under the statute, the Tier 3 standard deduction may not be claimed if the taxpayer claims the deduction for Military and Railroad income. In addition, unlike with the Tier 2 standard deduction, under the statute, the Tier 3 taxpayer must choose between claiming the standard deduction or claiming the Social Security benefits deduction and personal exemptions.[7] But, similar to the treatment of Military and Railroad income under Tier 2, to ensure taxpayers receive the maximum available benefit under Tier 3, the Department has designed its forms and instructions to treat the Military and Railroad income and Social Security benefits deductions and personal exemptions as reductions to the standard deduction. Thus, a taxpayer will effectively receive the full benefit of the standard deduction if the standard deduction is larger than the total of the taxpayer’s Military and Railroad Income and Social Security benefits deductions and personal exemptions.

III.     Limitations on retirement or pension benefits deduction for survivors: 2012 to 2019. 

Prior to 2020 PA 65, the MITA provided that the limitations on the benefits deduction were based on the age of the older spouse for joint filers.[8] Although the statute referenced joint returns and was silent on survivors, the Department determined that the retirement or pension benefits that were decedent-derived would be deductible on the survivor's return based on the decedent's date of birth. Under the Department's interpretation, remarriage did not affect use of the decedent's date of birth for purposes of the benefits deduction.

From 2012 through 2019, the Department allowed the survivor to claim a benefits deduction based on:

• The date of birth of the decedent, but only for the decedent-derived benefits.
• The date of birth of the survivor for any survivor-derived benefits.

Further:

• The survivor's use of the decedent's date of birth for the decedent-derived benefits was not affected by remarriage.
• Upon reaching age 67, a Tier 2 or Tier 3 survivor could no longer claim any benefits deduction. Instead, the survivor could claim the standard deduction, subject to applicable limitations based on the survivor's date of birth.

IV.     Limitations on retirement or pension benefits deduction for survivors beginning in 2020.

a.     Codification of the survivor's benefits deduction. 

2020 PA 65 codified into statute the benefits deduction for survivors. 2020 PA 65 provides:

If a deduction under subsection (1)(f)[9] was claimed on a joint return for a tax year in which a spouse died and the surviving spouse has not remarried since the death of that spouse, the surviving spouse is entitled to claim the deduction under subsection (1)(f) in subsequent tax years subject to the same restrictions and limitations, for a single return, that would have applied based on the date of birth of the older of the 2 spouses. For tax years beginning after December 31, 2019, a surviving spouse born after 1945 who has reached the age of 67 and has not remarried since the death of that spouse may elect to take the deduction that is available against all types of income subject to the same limitations and restrictions as provided under this subsection based on the surviving spouse's date of birth instead of taking the deduction allowed under subsection (1)(f), for a single return, based on the date of birth of the older spouse.[10]

2020 PA 65 increases the survivor’s benefits deduction beyond the amount allowed by the Department’s prior interpretation for some taxpayers and decreases it for others.

b.     Survivor may use the older spouse's date of birth for all benefits.

The survivor may use the date of birth of the older of the survivor or decedent regardless of whether the benefits were derived from the decedent or the survivor. Prior to 2020, the benefits deduction was tied to the date of birth of the spouse from whom the benefits were derived.

Example 1. A Tier 3 survivor has an annual benefit of $30,000 and receives benefits derived from a Tier 1 decedent of $25,000. Both benefits are from private retirement plans. The decedent died in 2019. The survivor filed a joint return for 2019 and claimed a deduction under subsection (1)(f). The survivor, filing single for 2021, may claim a benefits deduction of $54,404.[11]  Prior to 2020, the benefits deduction was more limited. The survivor would not have been able to claim a benefits deduction for the survivor-derived benefits[12] and would have been limited to a $25,000 benefits deduction for the decedent-derived benefits.

c.     At age 67, the survivor may elect the benefits deduction or the standard deduction. 

Survivors who were claiming a decedent-derived benefits deduction no longer lose that deduction upon turning age 67; however, survivors may elect to claim the standard deduction if it is greater.

Example 2. Using the same facts as in Example 1, the survivor, filing single for 2021, may claim a benefits deduction of $54,404.[13] Upon reaching age 67, the Tier 3 survivor may elect to continue claiming the benefits deduction. In this instance, the benefits deduction would provide a lower tax liability since the Tier 3 survivor at age 67 would otherwise receive the $20,000 standard deduction.[14]

Example 3. A Tier 3 survivor filed a joint return with a Tier 2 decedent for 2018 (the year of death) when the decedent was 66. In addition to the decedent-derived benefits deduction of $20,000, the survivor also deducted annual income from a military pension of $25,000.[15] In 2020, the survivor turned 67 and elected to continue claiming the benefits deduction rather than the standard deduction. As a result, the survivor received a benefits deduction of $20,000 and a military pension deduction of $25,000, for a cumulative deduction of $45,000.[16] If the survivor had claimed the Tier 3 standard deduction of $20,000 instead, that deduction effectively would have been reduced by the amount of the survivor’s military pension deduction.[17] Because the survivor’s military pension deduction exceeded $20,000, the standard deduction would have been reduced to $0 and the survivor would only have received the $25,000 military pension deduction.

Example 4. A Tier 2 survivor filed a joint return with an older Tier 2 decedent for 2017 (the year of death) when the decedent was 66. The survivor deducted the decedent’s pension benefit of $15,000 and Social Security benefits, and claimed 2 personal exemptions, leaving the survivor with some taxable income from a job. In 2020, the survivor turned 68 and, under 2020 PA 65, elected to claim the standard deduction based on the survivor’s date of birth. As a result, the survivor received an unrestricted deduction of $20,000 to apply against the decedent’s $15,000 pension benefit and the survivor’s other taxable income.[18]

d.     A survivor may not elect the decedent's standard deduction.

2020 PA 65 allows a survivor to claim a decedent-derived benefits deduction if the couple had claimed a decedent-derived benefits deduction on a joint return for the year of death. It does not allow a survivor to claim a decedent-derived standard deduction. While this requirement has no effect on the survivor of a Tier 1 decedent, it may affect the deduction for the survivor of a Tier 2 or Tier 3 decedent.

Example 5. A Tier 2 decedent died at age 66 in 2017. For the year of death, the Tier 3 survivor filed a joint return claiming a $40,000 benefits deduction. The survivor (who turned 67 in 2020) may claim a Tier 2 $20,000 benefits deduction as a single filer on a 2020 income tax return rather than the $20,000 Tier 3 standard deduction against all types of income. The standard deduction may be less advantageous because it must be reduced by the amount of any deduction for Military and Railroad income and Social Security benefits and by the amount of the personal exemption.

Example 6. Same facts as Example 5, except the Tier 2 decedent died a year later, in 2018, at age 67. For the year of death, the survivor filed a joint return claiming a $40,000 Tier 2 standard deduction, as well as a deduction for Social Security benefits, and personal exemptions. The Tier 3 survivor may not claim a Tier 2 standard deduction for 2020 since the standard deduction is not a “deduction allowed under subsection (1)(f),” as provided under 2020 PA 65. The survivor (who turned 67 in 2020) may only claim the Tier 3 standard deduction of $20,000, which must be reduced by the amount of any deduction for Military and Railroad income and Social Security benefits and by the amount of the personal exemption.

Example 7. A Tier 3 decedent died at age 67 in 2020. For the year of death, the Tier 3 survivor (who turned 63 in 2020) filed a joint return claiming a $40,000 Tier 3 standard deduction. The Tier 3 survivor may not claim a Tier 3 standard deduction for 2021 since the standard deduction is not a “deduction allowed under subsection (1)(f),” as provided under 2020 PA 65, and the survivor is not yet 67.

e.     SSA-exempt benefits deduction. 

The benefits deduction for Tier 2 and Tier 3 taxpayers is increased if the taxpayer receives retirement or pension benefits from employment with a governmental agency that was not covered by the federal social security act ("SSA-exempt.").[19]

For Tier 2 taxpayers, the SSA-exempt benefits deduction is $35,000/single filer and $55,000/joint filers. If both spouses receive SSA-exempt benefits, the deduction is $70,000 on a joint return.[20] At age 67, the standard deduction against all types of income is similarly increased.

For most Tier 3 taxpayers aged 62 through 66, the SSA-exempt benefits deduction is $15,000 for single filers and $15,000 for joint filers. If both spouses receive SSA-exempt benefits, the deduction is $30,000 on a joint return.[21] At age 67, the benefits deduction is replaced by the standard deduction against all types of income of $20,000 for single filers and $40,000 for joint filers.

For Tier 2 taxpayers, the standard deduction must be reduced by the amount of any deduction for Military and Railroad income.[22] For Tier 3 taxpayers, the standard deduction must be reduced by the amount of any deduction for Military and Railroad income and Social Security benefits and by the amount of the personal exemption.[23]

f.     Decedent-derived SSA-exempt benefits deduction for survivors.

The increased benefits deduction for pension or retirement benefits from SSA-exempt employment is treated in the same manner as benefits from other types of employment.

Example 8. The decedent died in 2019. For the year of death, the decedent and survivor were both age 64 (Tier 3), and the survivor filed a joint return. The decedent received SSA-exempt benefits of $25,000, and the survivor received non-SSA-exempt benefits of $30,000. For 2019, the survivor could claim a benefits deduction of $15,000 on a joint return, which is the maximum allowed SSA-exempt benefits deduction for Tier 3 taxpayers where only one spouse had SSA-exempt benefits. The survivor may claim the SSA-exempt benefits deduction of $15,000 for 2020. At age 67, the survivor may elect to continue claiming the benefits deduction of $15,000 or may claim the $20,000 standard deduction against all types of income based on the survivor’s age. Since the standard deduction for Tier 3 taxpayers must be reduced by the amount of any deduction for Military and Railroad income and Social Security benefits and by the amount of the personal exemption, electing the SSA-exempt benefits deduction, which is not subject to those restrictions, may be a more advantageous choice for the taxpayer.

g.     SSA-exempt benefits for decedents born after 1945 who retired as of January 1, 2013. 

The general SSA-exempt benefits deduction is described in the preceding section for most Tier 3 taxpayers. However, Tier 3 taxpayers who retired from SSA-exempt government service as of January 1, 2013, receive the same benefits deduction as Tier 2 taxpayers with SSA-exempt derived benefits.[24]

Example 9. The decedent retired as of January 1, 2013, and died in 2018. For the year of death, the decedent and survivor were both age 63 (Tier 3), and the survivor filed a joint return. The decedent received SSA-exempt benefits of $25,000 and the survivor received non-SSA-exempt benefits of $35,000. Because the decedent’s retirement date allowed the couple to claim the Tier 2-level benefits deduction, for 2018, the couple could claim a benefits deduction of $55,000 on a joint return, which is the maximum allowed SSA-exempt benefits deduction for Tier 2 taxpayers where only one spouse had SSA-exempt benefits. The survivor may claim the SSA-exempt benefits deduction of $35,000 on a single return for 2020. At age 67, the survivor may elect to continue claiming the benefits deduction of $35,000 rather than the Tier 3 $20,000 standard deduction against all types of income.

h.     Remarriage. 

Prior to 2020 PA 65, the Department allowed a surviving spouse to continue to claim a benefits deduction based on the date of birth of the decedent for decedent-derived benefits until the survivor reached age 67. Before the new law was enacted, the survivor did not lose the decedent-derived benefits deduction after remarriage. Under 2020 PA 65, the survivor cannot claim any decedent-derived benefits deduction upon remarriage.

[1] MCL 206.30(1)(f)(i), (ii), and (iv).

[2] MCL 206.30(1)(f)(iv) limits the deduction for nonpublic plans. Private retirement or pension benefits have a maximum dollar amount indexed to inflation. For 2021, the maximum private benefits deduction was $54,404 for single filers and $108,808 for joint filers.

[3] 2011 PA 38.

[4] MCL 206.30(8)(c).

[5] MCL 206.30(9)(a).

[6] MCL 206.30(9)(b).

[7] MCL 206.30(9)(e).

[8] Former MCL 206.30(9)(f).

[9] Generally, public and private plans and IRAs are deductible under MCL 206.30(1)(f). Military and Railroad income is deductible under MCL 206.30(1)(e).

[10] MCL 206.30(9)(f).

[11] Private retirement or pension benefits have a dollar limitation indexed to inflation. MCL 206.30(1)(f)(iv). For 2021, the maximum private benefits deduction was $54,404 for single filers and $108,808 for joint filers.

[12] This is because the survivor would have had to use their date of birth for determining the deductibility of survivor-derived benefits. As mentioned above, a Tier 3 taxpayer does not qualify for a benefits deduction; however, most will qualify for the standard deduction upon reaching age 67.

[13] See Footnote 10.

[14] For the years 2012 through 2019 (prior to 2020 PA 65), the Department required the survivor to take the standard deduction based on the survivor's date of birth.

[15] Note that the military pension may be deducted without limitation under MCL 206.30(1)(e). The limitations on benefits deductions apply to general retirement and pension benefits under MCL 206.30(1)(f).

[16] Note that because the decedent died before aging into the Tier 2 standard deduction, the survivor may continue to claim the benefits deduction even though the decedent would have been 68 in 2020.

[17] MCL 206.30(9)(e).

[18] Note that a Tier 2 taxpayer who is 67 or older may claim the Social Security benefits deduction and personal exemption in addition to the standard deduction. Thus, the survivor's election here effectively increased the survivor's deduction by up to $5,000, depending on the amount of the survivor's otherwise taxable income.

[19] Chapter 531, 49 Stat 620.

[20] MCL 206.30(9)(c).

[21] MCL 206.30(9)(d).

[22] MCL 206.30(9)(c).

[23] MCL 206.30(9)(e).

[24] MCL 206.30(9)(c).