Tax & Accounting Blog

Michigan Supreme Court Strikes Down One Provision of the State’s New Tax Law Affecting Retirement Payments

1099, ONESOURCE, Tax Information Reporting, Trust Tax December 5, 2011

In an advisory opinion issued November 18 on the constitutionality of several provisions of the new Michigan tax law that concerns state income tax and withholding on retirement benefits, the state Supreme Court ruled that basing exemptions and deductions on “total household resources” violates the Michigan constitutional prohibition against a graduated income tax. That strikes down two subsections of new law (MCL 206.30(7) and 206.30(9)), which would have phased out the use of personal tax exemptions and deductions for individuals with “household resources” of $75,000 or more, or $150,000 or more for joint filers.

On three other constitutional questions in regard to the new law, the Court ruled that the tax provisions do not violate the state constitution or the United States Constitution, and the law (2011 PA 38) can continue in effect with only MCL 206.30(7) and (9) severed. Both public and private pension income will become subject to Michigan income tax and withholding as of January 1, 2012. Determining eligibility for income-tax exemptions on the basis of date of birth will be permitted.

Michigan’s new law requires the entity disbursing pension or annuity payments to withhold Michigan income tax withholding beginning in 2012 on the taxable part of payments from an employer pension, annuity, profit-sharing, stock bonus or other deferred compensation plan as well as from an individual retirement arrangement, an annuity, an endowment or a life insurance contract issued by a life insurance company.

Withholding is not required on the portion of a pension or retirement distribution that is exempt from tax; exemption depends on the date of birth (for joint filers, the date of birth of the oldest spouse must be used) and also personal exemptions, which may reduce the taxable portion of a distribution.

Eliminating the “total household resources” provision removes one administrative concern for payers that have recipients subject to Michigan withholding. A remaining concern is the short amount of time available for implementation. To conform to the Court’s opinion the state Department of Treasury, which had already issued a Form MI W-4P for payments made in 2012, will need to revise that form and instructions to eliminate the “household resources” sections and will need to revise and reissue the new Pension Withholding Guide.