Michigan Tax Planning for Individuals

With the end of the year quickly approaching, it is a good time to look at some final year-end tax planning ideas.  In most of the recent years, we have not really looked closely at tax planning as it relates to  State of Michigan taxes.  From an individual standpoint there have been relatively few changes that have had major effects on Michigan taxes.  That has changed this year.

In 2012, there are major tax changes.  The major change is in the taxation of pension benefits along with other changes that effect taxation of certain income and the removal of various credits.  Knowing what these changes are allows us to do some tax planning in 2011 regarding the timing of potential income and credits.  Below are listed two tax planning ideas as examples.  Before making any final decisions on tax planning, you should consider all the ramifications of those decisions as each tax situation is different.  As tax advisors, we are always available to help you analyze both your state and federal tax situations and various planning opportunities.

Pension Taxation –

In 2011, pension and IRA distributions are excluded from taxation in the State of Michigan for the first $45,120 for single taxpayers and $90,240 for joint filers.  This all changes in2012 with pension benefits being  taxed differently  depending on your year of birth.  As an example, people born prior to 1946 will continue to have the current exclusion while people born after that will have lower or no exclusions from taxable income.  If you click on the following link, you will find a chart detailing the various taxation levels for the pension and IRA distributions.

http://www.michigan.gov/documents/taxes/Tax_Change_Summaries_-_Retirement_Exemptions_359799_7.pdf

Pension taxation planning for Michigan –

Depending on the amounts of your discretionary pension, IRA or 401k plan distributions, you may want to push income into 2011 to avoid the Michigan income taxation on those distributions in 2012.  This obviously has an effect on your federal taxation so you should review closely your entire tax situation with your tax advisor prior to making this decision.

Credit eliminations and changes in deductions - 

The following link listing of the credits , deductions and exemption changes starting in 2012.  As an example, the credit for contributions to Michigan Colleges and Public Libraries, credit for Homeless Shelters and Food Banks along with the credit for contributions for Community Foundations is being eliminated.  This had been a nonrefundable credit against Michigan income tax of up to 50% of the contributions with the maximum contribution amounts being $200 for a single taxpayer and $400 for joint filers.

http://www.michigan.gov/documents/taxes/Tax_Change_Summaries_-_Individual_Income_Tax_359807_7.pdf

Credit planning for Michigan –

If you contribute to any of the three categories listed above in amounts less than the maximum limit ($200 per single and $400 for joint filers), you may want to make your 2012 contribution in 2011 and receive the 50% credit for that contribution in 2011.

Michigan Tax Planning for Business

As of January 1, 2012 the Michigan Business Tax (MBT) has been replaced with the Michigan Corporate Income Tax (CIT).  While the MBT required all businesses, no matter what the entity type (Corporation, S Corporation, LLC or sole proprietorship) to file returns if their gross receipts exceeded $350,000 the CIT is for business entities filing as C Corporations only.  Therefore, flow-through entities such as S Corporations, Partnerships, LLCs and sole proprietors will not be subject to a separate business tax.

The CIT rate is set at 6% and is based on the federal taxable income of the entity (with some adjustments).  The unitary business group rules are still in force so in some cases there will be combined tax returns filed for businesses linked by common control or ownership.  There are other taxation rates and computations available for the finance and insurance industries.   Businesses with certain certification credits may elect to continue filing the MBT returns.

This change in the tax law offers some tax planning opportunities in 2011.  Depending on the individual circumstances you may want to purchase inventory or assets prior to December 31, 2011 as the tax benefits may have a greater positive effect on the MBT return in 2011 as compared to the tax effect it will have in 2012 with either the CIT or no business tax at all. 

For a recap of the  Michigan CIT tax changes you can go to http://www.michigan.gov/documents/taxes/Tax_Change_Summaries_-_Corporate_Income_Tax_359811_7.pdf

As always we are available to help you analyze the effect of how this tax change will affect you and to advise you on tax strategies to minimize the overall taxes of your businesses.