Overview of Michigan Retirement Tax Friendliness
Michigan does not tax Social Security retirement benefits, and it provides deductions on all other types of retirement income. Homeowners pay relatively high property tax rates, but sales taxes are moderate.
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- Our Expert
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.
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Is Michigan tax-friendly for retirees?
In short, Michigan is a relatively 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 $54,404 per person ($108,808 for joint filers) for tax year 2022. These taxpayers can also subtract interest, dividends and capital gains up to $12,127 for single filers and $24,254 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 1.32%, which is pretty high. That adds up to about $1,320 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 2.16%. In Mackinac County, it is less than half that at 1.06%.
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 $60,600 or less and your home’s taxable value must be no more than $136,600. You also need to have owned or were contracted to pay rent while occupying a Michigan homestead for at least 6 months during the year where property taxes and/or service fees were imposed.
You are not eligible if 100% of your household resources were received from the Michigan Department of Health and Human services.
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.