They say the only certainties in life are death and taxes. Well, that’s almost true, with one small caveat. The only true certainties are death and tax changes. Case in point: Michigan’s new tax law for retirees that’s poised to phase-in over the next four years!
For retirees, this article might bring up ugly memories of 2012 when then-Governor Snyder controversially changed how retirees were taxed. Over the last 11 tax seasons, his complex system resulted in higher taxes for a growing legion of retirees. But, starting in 2023, a new, complex system is in place. This one, however, will result in lower taxes for retirees.
To set the table on the new law, for those born on or before 1945, there are no changes. Think of this group of retirees as the “finish line” that everyone else is now marching toward. This older cohort gets to deduct their pension benefits and retirement account distributions up to about $60,000 (single) and about $120,000 (married.) These deduction limits also grow with inflation each year.
For the rest, you are going to transition into the new tax law. Over the next four tax years, your deduction amount will march in 25% steps toward the big “finish line” deductions above. This means by 2026 all retirees will essentially be taxed the same. Then, and only then, will things be simple. But, until 2026, not so much!
The new law’s complexity starts in 2023. For those born between 1946 and 1958, this year you’ll get a choice of using either the old law’s deduction limits of up to $20,000 (single) and up to $40,000 (couple) or taking 25% of the “finish line” deduction. Naturally, for 2023, this 25% multiplier adds a wrinkle for a subset of retirees in this age cohort.
For those born between 1946 and 1952, your choice for 2023 will be to use the old law. For those born in 1953, 1954, 1955 and 1956, some math is needed to determine if the old law or new law is better for you in 2023. And, for those born in 1957 or 1958, no math is needed as getting some deduction under the new law is clearly better than getting no deduction under the old law.
For everyone else, you’ll have to wait beyond 2023 for your tax relief.
For those born in 1959, 1960, 1961 and 1962, mark your calendar for tax relief starting in 2024. For those born in 1963, 1964, 1965 and 1966, mark your calendar for 2025. And, for those born in 1967 or later, your tax relief starts in 2026.
Now, let’s place a small wager. How much do you want to bet that this new law is already on the chopping block?