Treasury has commented on the following areas of recently enacted legislation.   I have hyperlinked the text below, you may click on the word to go to Treasury's website and read more on a particular area:

• Individual Income Tax

• Retirement Benefit Changes

• Corporate Income Tax Changes

• Withholding Changes 

The comments reflect the law with new terms such as, "Total Household Resources."  This term replaces, "Total Household Income" and impacts more than the Homestead Property Tax Credit. "Total Household Resources" impacts the personal exemption phase-out, the senior retirement exemption and the homestead property tax credit. In addition to the expanded use, it carries with it a slight but important change in calculation. The new term excludes losses from business, rentals, royalties and net operating losses.

A "Retirement Changes" chart is provided that will help make sense of what categories your client fits when determining how pensions are taxed or not, based on the age of the taxpayer. Don't forget, when a joint return is filed, the age of the eldest spouse dictates how pension income is taxed for both spouses.

In my previous blog I wrote about changes to Michigan's pension exclusion.  There are other changes to consider which limit or eliminate exemptions, deductions and credits.  In this blog post I describe the limitation or outright elimination of the personal exemptions.

1)      Personal exemption phase-out
Under prior law, $3,700 (TY 2011, indexed to inflation) was exempt from Adjusted Gross Income for each personal exemption claimed on the federal income tax return. 

New Law phases-out the personal exemption for single taxpayers between the income range of $75,000 and $100,000 and for married taxpayers between the income range of $150,000 and $200,000. 

Taxpayers with incomes above the upper bound receive no personal exemption.   The formula for the phasing out of the exemption (single filer) is:

Personal Exemption multiplied by:

                   $100,000 – Total Household Resources

                                               $25,000

2)      Eliminate the $2,300 for each taxpayer and every dependent of the taxpayer who is 65 years of age or older.  When a dependent of a taxpayer files an annual return under this act, the taxpayer or dependent of the taxpayer, but not both, may claim the additional exemption allowed under this subdivision.

3)      Eliminate the $2,300 (TY 2010, indexed to inflation) special exemptions for seniors and individuals with unemployment compensation equal to or greater than 50% of their AGI (adjusted gross income, Michigan's starting point from the federal return).

4)      Eliminate the $600 additional exemption per dependent child under the age of 19.

What I have found is the number of changes made to the individual income tax act surprises most.  Many are aware of the changes to the pension exclusion because of the amount of press received.  What you will see throughout the series of blogs is the elimination and changes made to the exemptions, credits and deductions previously available.  With the elimination of the Michigan Business Tax, these changes are meant to help plug an estimated 1.7 billion dollar reduction in amount collected under the new corporate income tax.

Changes to Michigan’s individual income tax (starting in 2012) have received a lot of press -- especially the changes to the pension exclusion. Given all the questions surrounding the changes to the pension exclusion, I thought I would reiterate the changes to the law. Taxpayers will be classified into one of three categories (shown in bold below):

• Taxpayers born before 1946 continue to have the same treatment of retirement and Social Security income as in prior law, and may claim the personal exemptions for which they are eligible.

• Taxpayers born in 1946 through 1952 may take an exemption of $20,000 for a single return and $40,000 for a joint return against retirement income until age 67 when they may take that same exemption amount against all types of income.

These taxpayers at any age may claim personal exemptions for which they are eligible and may exempt Social Security income.  However, the $20,000/$40,000 exemption is not available when total household resources exceed $75,000 for a single return or $150,000 for a joint return.

• Taxpayers born after 1952 receive no exemption for retirement income until reaching age 67, except for the Social Security exemption.  Once the taxpayer reaches the age of 67,

(1)              the taxpayer has a choice between the $20,000/40,000 exemption against all types of income, with no personal exemptions and with no additional exemption for Social Security
or

(2)              continuing the exemption for Social Security, along with the personal exemptions for which they are eligible. 

However, the $20,000/$40,000 exemption is not available where total household resources exceed $75,000 for a single return or $150,000 for a joint return.

The pension exclusion is dependent on one's age and determines which of the three categories the taxation of pension income fits. If a joint return is filed, the age of the eldest spouse controls which category all pension income fits and how the pension income is taxed.

History:

You may remember the deferred income tax adjustment was one of the many confusing issues with the MBT. The MBT is considered an income tax, whereas the SBT was not considered an income tax. This change in taxation required many companies to book a deferred tax adjustment (often times a liability) for the MBT starting with the first period after July 12, 2007 (date of enactment).

Because of the initial deferred tax adjustment, most business’ balance sheets post SBT were reduced in value as a result of booking the deferred MBT liability. The legislature heard this and amended the law to allow for a one-time adjustment, creating an offsetting future deduction which was a deferred tax asset to the extent of the initial deferred tax liability. This deduction, which cannot be used until 2015, reduces the business income tax base on a proportional basis each year through 2029. With the repeal of the MBT (for most taxpayers) what happens to the MBT Deferred Tax asset created?

Current Impact to Financials with the Repeal of the MBT:

Now that the MBT is repealed for companies (with the exception of a few who have "Certificated Credits” who may elect to keep filing the MBT) the asset created will be written-off. What this translates to for financial statement purposes (i.e. GAAP Basis Financial Statements) is a reduction to book income to the extent of the MBT asset created for the first period ending after July 12, 2007. Companies not publicly traded with a December year-end most likely made this adjustment based on the balance sheet date of December 31, 2007.

What About the Michigan Corporate Income Tax?

Does history repeat itself? As with the implementation of the MBT, there are similar concerns with the Michigan Corporate Income Tax (CIT). Will taxpayers be able to carryover the deferred liability created under MBT to the CIT?  Maybe but seems unlikely.

However, Senate Bill 480, introduced on June 16, 2001 will allow a unitary business group who filed the Michigan Business Tax, "Book-Tax Difference", "Form 4593".  If enacted, the bill allows a unitary taxpayer to carryover it's deferred tax asset and to adjust its business income to account for the assets that generated the book-tax differences reported on "Form 4593". The adjustment would apply in computation of sale of disposition of assets creating the initial deferred liability under the MBT.

Considering the language of Senate Bill 480, what about non-unitary filers who filed Form 4593?

In addition to the write-off of the asset created under the MBT, c-corporations are faced with recording a deferred tax liability under the new CIT. For those c-corporations who issue quarterly financial statements, this issue is relevant as of October 1, 2011.

Pass-through entities will not have a deferred tax liability under the new CIT. Pass-through entities are not subject to the business entity tax they had in Michigan under the SBT and MBT, and must write-off the net MBT deferred tax amount.

Major Tax Reform in Michigan is here. Effective January 1, 2012, the following Public Acts make sweeping changes to Michigan's Income Tax structure.

Public Act 38 of 2011 amends the Income Tax Act, eliminating numerous credits, deductions and exemptions, as well as changing future tax rates. Public Act 38 also creates the new Corporate Income Tax, which will be levied on businesses organized as traditional corporations under Federal law. The Act divides the Income Tax Act into two parts: Part One contains changes in the existing personal income tax, and Part Two, which is entirely new, contains provisions for a corporate income tax.

Public Act 39 of 2011 amends the Michigan Business Tax (MBT) Act to allow certain taxpayers that wish to claim select credits allowed under the law to continue claiming those credits if they continue to file returns under the MBT Act.

Public Act 40 of 2011 amends the Multistate Tax Compact to remove the option for certain out-of-state taxpayers to apportion their tax base (under either the MBT or the new Corporate Income Tax) using an equally weighted three-factor formula instead of the 100%-sales factor formula specified in the MBT and the Corporate Income Tax.

Over the next few blog posts I will identify many of the changes. In the next blog I will discuss perhaps one of the most controversial changes, and thought to be a significant revenue raiser, Eliminating, Limiting, and Restructuring the Exemption for Pension and Retirement Income.

The change to the exemption through Public Act 38 of 2011 phases-out the exemption for pension and retirement income for seniors.

There are several seminar offerings through the MACPA starting Friday June 3^rd. Here is the link so you may view the locations where the seminars are offered and sign-up:

 http://www.ehtc.com/ehtc/eventssalt.htm

The seminar on June 9^th, 2011 is a 1 hour presentation on legislative updates at both the federal and state level; all other seminars are 8 hour sessions on the MBT and the changes to the income tax structure that I identified in this blog post.

On April 28, 2011, the Michigan House of Representatives passed a bill that will, if enacted, implement numerous corporate and personal income tax changes that Gov. Rick Snyder proposed in his budget.

Key points included in the bill:

• a corporate income tax levied on C corporations at a rate of 6%

• unitary business groups are required to file a combined return

• the tax base will not include IRC §168(k) (bonus depreciation) or IRC §199 (domestic production activities deduction)

• apportionment is based on a 100% sales factor

• insurance companies are subject to a gross direct premiums tax at a rate of 1.25%

• financial institutions are subject to a franchise tax at a rate of 0.29%

• the personal income tax rate will be 4.25% beginning January 1, 2013

• the personal income tax deductions for interest and dividends for senior citizens won't be available for senior citizens born after 1945

• the personal income tax deduction for pension benefits for senior citizens will be curtailed based on the taxpayer’s birth year and household resources

• the personal exemption won't be allowed for single taxpayers with household resources over $100,000 or for joint taxpayers with household resources over $200,000

• many credits against the personal income tax are eliminated.

In addition, business taxpayers with a certificated credit will, for the first tax year after 2011 only, be able to elect to pay the Michigan Business Tax instead of the corporate income tax. Such taxpayers can continue to pay the MBT until the credit and any carryforward are used up. The MBT would be repealed after all the certificated credits were claimed. Generally, the bills would be effective January 1, 2012.

Share your thoughts on the most recent budget proposal, here we go again...

On April 30, 2011, the Michigan Department of Treasury revised its notice regarding federally disregarded entities and the Michigan Business Tax, originally published on November 29, 2010. The notice is revised to extend the time for filing amended returns free of penalties from June 30, 2011 until October 31, 2011.

I wrote a blog on the notice issued on November 30, 2010, blog linked here.  That blog describes in detail, key points of the notice that have not changed. In addition, I have linked the revised notice here so you may view and download it.

Last, there are ongoing efforts for a legislative solution; hopefully there will be something to report soon.

Give me a call at 616-575-3482 or reply to the Blog if you want to share your thoughts.