For the 2023 tax season, Michigan has a new tax law for retirement income. It’s being “phased in” over four years. Let’s try to break it down.
Like the old law, the new law is based on birth years.
Group A: For those born on or before 1945, there is no change. These retirees get to deduct their retirement income up to about $60,000 (single) / $120,000 (married) for 2023. Think, pension benefits and IRA distributions.
This is where things start to get just a little more complicated.
Group B: For retirees born in 1946 through 1952, you get to deduct $20,000 (single) / $40,000 (married.) For tax season 2023, effectively there is no change, either.
Things still feel simple enough, so far.
Group C: For retirees born after 1952 and 1956 (to be included in this group, you must reach age 67 by the end of the tax year), you also get to deduct $20,000 (single) / $40,000 (married). But, there’s a catch! The deduction is reduced by the taxable portion of their Social Security benefits as well as their personal exemptions.
The “catch” adds a wrinkle of complexity.
Group D: For those born in 1957 and 1958, the old law provided zero deduction. For the 2023 tax season, they’ll benefit under the new law as shown below. Please note, younger groups will have to wait for the 2024, 2025 and 2026 tax years to see the benefits.
Up until now, I have been describing the old law. The reason for that review is the new law requires us to basically “overlay” it on top of the old law to figure out which is better. How’s that for complexity!
For the 2023 tax season, under the new law Group B and Group C will be entitled to 25% of the deduction amounts that’s been afforded to Group A all along. If the new law works out to be better than the old law, they can choose the new law’s “25% phased-in” deduction. That works out to be about $15,000 (single) / $30,000 (married.)
For Group B, the old laws’s deductions of $20,000 (single) / $40,000 (married) are clearly better than the new law’s 2023 phase-in deductions.
For Group C, the old law had that “catch” (see above to review.) As a result, the new law might work out better for them. It all depends on the level of their Social Security benefits and retirement income received.
For Group D, the old law gave them no deduction at all. In this case, the new law’s deduction is clearly better.
Fortunately, next year we get to do this all over again! Except, at that time, we’ll have a “50% phase-in” to overlay on top of the old and we’ll introduce Group E into the mix. Thankfully, we can save that added complexity for another day!
Jason P. Tank, CFA, CFP® is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com
