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Revenue Administrative Bulletin 1988-25
Approved: May 27, 1988
INDIVIDUAL INCOME TAX - DEDUCTION OF RETIREMENT AND PENSION BENEFITS RECEIVED FROM A PUBLIC RETIREMENT SYSTEM OF ANOTHER STATE
RAB-88-25. This Bulletin describes the Michigan income tax treatment of retirement and pension benefits received from a public retirement system of another state.
A resident is allowed to determine his or her deduction of retirement or pension benefits from a public retirement system of, or created by, another State or any of its political subdivisions under the Michigan Income Tax Act, MCL 206.30(1)(f)(ii) and the Michigan Income Tax Rules, 1979 AC, R 206.11(2)(b)(i). In calculating the amount of pension benefits deductible from Michigan taxable income, the provision allowing the greater deduction is permitted.
Under MCL 206.30(1)(f)(ii), a resident is allowed a deduction to the extent included in adjusted gross income of "[a]ny retirement or pension benefits received from a public retirement system of or created by another state or any of its political subdivisions if the income tax laws of the other state permit a similar deduction or exemption or a reciprocal deduction or exemption of a retirement or pension benefit received from a public retirement system of or created by this state or any of the political subdivisions of this state." A public retirement system includes retirement and pension benefits received from the state and its local units of government and includes public colleges and universities.
The Michigan Income Tax Act, MCL 206.20(2), defines the term "state" as meaning "... any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country, or political subdivision, thereof."
This provision allows a Michigan resident to claim a subtraction on the Michigan income tax return of retirement or pension income received from a public retirement system of another state to the extent the other state permits a similar deduction to a resident of that state who receives pension benefits from a Michigan public retirement system. The deduction is limited to the smaller of: (1) the amount of deduction allowable by the other state to their residents who receive Michigan public pensions and retirement benefits, or (2) the amount of pension income included in federal adjusted gross income.
A resident who does not receive a larger deduction of retirement or pension benefits under MCL 206.30(1)(f)(ii) is allowed to claim a deduction of pension income from plans of other state governments under the provisions of Michigan's Income Tax Rules, 1979 AC, R 206.11(2)(b)(i).
The deduction is limited to the lesser of: (1) $7,500.00 ($10,000.00 on joint returns), or (2) the amount of the other state's retirement or pension income that is included in adjusted gross income.
The Michigan Income Tax Rules, 1979 AC, R 206.11(b)(i), provide that retirement and pension benefits from plans of state governments other than Michigan, and other political subdivisions, agencies, or instrumentalities which are included in adjusted gross income, are deductible to a maximum of $7,500.00 ($10,000.00 on joint returns). The aggregate of deductions taken by a married couple filing separately shall not exceed $10,000.00.
Example 1: A Michigan resident taxpayer received $7,200.00 of pension income from the Canadian Air Force. The taxpayer is required to file a combined Canadian Federal and Provincial income tax return and pay tax on the pension income. Under both the Canadian Federal and Provincial income tax laws, a resident is not allowed to claim a deduction of income from a Michigan public retirement plan. Therefore, under the Michigan Income Tax Rules, 1979 AC, R 206.11, the Michigan resident is allowed to claim a deduction of $7,200.00 on his Michigan income tax return.
Example 2: A married couple filed a joint Michigan income tax return for tax year 1986 as residents of this State. Included in their adjusted gross income in 1986 is pension income from the State of Minnesota for $25,000.00. He received $9,000.00, while she received $16,000.00. The State of Minnesota allows each resident a maximum pension subtraction of $11,000.00 of another state's public retirement plan. Therefore, a joint deduction of $20,000.00 is allowed on their Michigan income tax return. In this example, the Statute rather than the Rule benefited the taxpayers. The maximum deduction allowed under the Rule on a joint return is $10,000.00.
A nonresident taxpayer will allocate retirement and pension benefits to his or her state of residence if the income was constructively or actually received while he or she was a resident of the other state.