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Michigan Retirement Tax Friendliness

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Overview of Michigan Retirement Tax Friendliness

Michigan does not tax Social Security retirement benefits and provides a relatively large deduction on all other types of retirement income. Homeowners pay relatively high property tax rates, but sales taxes are moderate.

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is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
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    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Michigan Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

There are many reasons to retire in Michigan. It has the most freshwater coastline of any state besides Alaska, it has beautiful and mild summers, the highest number of public golf courses of any state (more than 800) and the rustic wild of the U.P. There are also reasons you may not want to retire in the Great Lakes State, particularly the long, cold winters.

And what about Michigan’s tax system? In general, that’s a plus. Michigan does not tax Social Security retirement income and provides a relatively large deduction on all other types of retirement income. Homeowners pay relatively high property tax rates, but sales taxes are moderate. Read on to learn more about these and other key retirement taxes in Michigan.

Is Michigan tax-friendly for retirees?

Yes. It does not tax Social Security and provides a sizable deduction to seniors on other types of retirement income (more about that deduction below). Sales taxes are somewhat below average, while property taxes are above average. Michigan does not have an estate tax or an inheritance tax.

Is Social Security taxable in Michigan?

No, it isn’t. Any Social Security retirement income that is considered taxable on your federal income tax return can be subtracted from your Adjusted Gross Income (AGI) when filing your state taxes in Michigan.

Are other forms of retirement income taxable in Michigan?

Yes – but seniors can deduct most or all of this income. The deduction applies to income from retirement savings accounts and pensions. It varies depending on the age of the filer.

Taxpayers 71 and older are eligible for a deduction of $50,509 per person ($101,019 for joint filers). These taxpayers can also subtract interest, dividends and capital gains up to $11,259 for single filers and $22,518 for joint filers.

Taxpayers between the ages 65 and 66 can claim a deduction of $20,000 ($40,000 for joint filers). Those between 67 and 71 can receive a deduction of $35,000 for single filers and $70,000 for joint filers. Anyone younger than 65 is not eligible for the deduction.

You can claim the deduction against the total of all retirement income (not including Social Security, which is fully exempt). If you are 80 years old and have $25,000 in annual income from a 401(k) and $10,000 from a pension, you could claim the deduction against all $35,000 of that income.

If, on the other hand, you had $60,000 in 401(k) income, the portion of it in excess of the deduction would be taxed at the Michigan flat income tax rate of 4.25%.

How high are property taxes in Michigan?

Very high. The average effective property tax rate in the Great Lakes State is 1.71%. That adds up to about $1,710 for every $100,000 in home value. Of course, property taxes are higher in some areas than in others. In Wayne County the average effective rate is 2.69%. In Mackinac County, it is less than half that at 1.07%.

What is the Michigan homestead property tax credit?

The homestead property tax credit is available to homeowners in Michigan who meet certain eligibility requirements for income and property value. Homeowners who are eligible can claim a credit on all property taxes owed.

Photo credit: ©iStock.com/RiverNorthPhotography

The credit application is filed with your annual income tax return. To be eligible, you must have household income of $50,000 or less and your home’s taxable value must be no more than $135,000. It’s important to note that taxable value can be no more than half of market value, so that limit is effectively $270,000 in home value.

Another form of property tax relief available to homeowners in Michigan is the principal residence exemption. This allows homeowners to exempt their primary residence from up to 18 mills of local school district operating taxes. (A mill is one tenth of a percent, so 18 mills is 1.8%, which applies to taxable value.)

How high are sales taxes in Michigan?

Below average. The state sales tax rate is 6% and Michigan has no local sales taxes.

What other Michigan taxes should I be concerned about?

If you plan on working during retirement, keep in mind that many Michigan cities collect their own income taxes in addition to the state income tax rate of 4.25%. In general, these city income taxes are 1% to 1.5%, but the Detroit city income tax is 2.4%. Those taxes do not apply to any form of retirement income, however.

Michigan does not have an estate tax or inheritance tax.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology To find the most tax friendly places for retirees, our study analyzed how the tax policies of each city would impact a theoretical retiree with an annual income of $50,000. Our analysis assumes a retiree receiving $15,000 from Social Security benefits, $10,000 from a private pension, $10,000 in wages and $15,000 from a retirement savings account like a 401(k) or IRA.

To calculate the expected income tax this person would pay in each location, we applied the relevant deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income after subtracting income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. The income tax category made up 40% of the index, property taxes accounted for 30%, sales taxes 20% and fuel taxes 10%.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2018 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration