Overview of Michigan Retirement Tax Friendliness
Michigan does not tax Social Security retirement benefits, and it provides a significant deduction on all other types of retirement income. Homeowners pay relatively high property tax rates, but sales taxes are moderate.
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Annual Income from Private Pension
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- Our Tax Expert
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.
Michigan Retirement Taxes
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, one of the highest number of public golf courses of any state (more than 650) and the rustic wild of the Upper Peninsula. 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, it'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 somewhat high property tax rates, but sales taxes are manageable.
A financial advisor in Michigan can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial planning - including taxes, homeownership, insurance and estate planning - to make sure you are preparing for the future.
Is Michigan tax-friendly for retirees?
In short, Michigan is a tax-friendly destination for retirees. It does not tax Social Security and it provides a sizable deduction for seniors on other types of retirement income. 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?
Social Security payments are not taxed in Michigan. 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 born before 1946 are eligible for a deduction against private pension income of $53,759 per person ($107,517 for joint filers) for tax year 2020. These taxpayers can also subtract interest, dividends and capital gains up to $11,495 for single filers and $22,991 for joint filers. Public pension income is completely exempt.
Taxpayers born between 1946 and 1952 can claim a deduction against all income of $20,000 ($40,000 for joint filers). For income from a government pension, that figure is $35,000 for single filers and $55,000 for joint filers ($70,000 for joint filers if each filer has such a pension). Taxpayers born after 1952 can claim the same deductions once they turn 67.
So, if you had $60,000 of 401(k) income and you were born in 1949, you would be able to deduct $20,000 of that income. The remaining $40,000 would be taxed at the Michigan flat income tax rate of 4.25%.
How high are property taxes in Michigan?
The average effective property tax rate in Michigan is 1.45%, which is pretty high. That adds up to about $1,450 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 2.35%. In Mackinac County, it is less than half that at 1.03%.
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.
The credit application is filed with your annual income tax return. To be eligible, you must have household income of $60,000 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, or PRE. 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?
The state sales tax rate in Michigan is 6%, which is slightly above average. But because the state has no local sales taxes, its state and local combined rates are also below average.
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 range from about 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.
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