Home Retirement House, Senate Democrats differ on when to give Michigan seniors pension tax relief

House, Senate Democrats differ on when to give Michigan seniors pension tax relief

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State House and Senate Democrats have moved on their individual tax plans which seek to offer some form of financial relief to Michiganders amid continued high inflation.

The problem? Their plans still don’t align, despite getting a green light from their individual chambers on Thursday, Jan. 26.

Senators passed Senate Bill 1 in a 23-15 vote and Senate Bill 3 by a 27-11 margin. The pieces of legislation ultimately seek to repeal Michigan’s tax on retirement pensioners while boosting its Earned Income Tax Credit to 30%.

The EITC aids low- to moderate-income workers and families get a tax break according to the Internal Revenue Service, though the amount returned is relative to if the filer has children, dependents, is disabled or meets a slew of other criteria.

The House, meanwhile, passed House Bill 4001 and 4002 in 67-41 and 100-8 votes, respectively. Like their Senate counterparts, the bills collectively address a tax repeal on retirement pensions while bumping up the state’s EITC rate.

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In both chambers, Republicans crossed over to vote in favor of Democratic lawmakers’ tax cut plans, giving each measure bipartisan support.

And while both House and Senate Democrats are in alignment on what to do with the EITC – quintupling the current 6% rate to 30% in the 2023 tax year while allowing individuals to also retroactively claim it in the 2022 tax year – how to address repealing a “pension tax” appears to remain a point of contention.

One of the biggest differences between the two plans is when it will go into effect

The House’s version of the bill would phase in a rollback on taxing retirement pensions until 2026, where pensions would return to pre-2011 methods of operating.

Under the bill, employer mandated matches would also be exempt, though elective or 457 plans would not. Those exemptions would occur under the tax tiers currently in place, with retirees able to choose the one most beneficial to them.

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Additionally, under House Democrats’ plan:

  • A phase down on taxed public retirement pensions would begin in 2023
  • Under the plan, retired Michiganders born between 1945 and 1959 could deduct up to 25% of the maximum amount of retirement or pension benefits in the 2023 tax year;
  • Those deductions would then jump to 50% for those born between 1945 and 1963 in the 2024 tax year;
  • A final decline of 75% in the 2025 tax year would occur for those born between 1945 and 1967
  • Beginning in the 2026 tax year, retirement pensions no longer be taxed

Limitations and restrictions of joint returns would be based on the date of birth of the older spouse filing the return. The plan as currently written is expected to cost the state $450 million when fully implemented during the 2025-26 fiscal year.

The Senate’s plan, however, would:

  • Do away altogether with taxing retirement pensions starting in the 2023 tax year;
  • Allow other forms of retirement to exempt the first $56,961 in income for a single filer and the first $113,922 for a joint return in the 2023 tax year;
  • That would apply to any other retirement or pension system or benefits from a annuity policy where benefits are made for life to a senior citizen, as noted within SB 1.

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Sen. Mary Cavanagh, D-Redford Township, chair of the Senate Finance, Insurance, and Consumer Protection Committee said repealing pension taxes altogether for the 2023 tax year made sense as it would give seniors “relief now, instead of in 2026.”

She did, however, say she understood trepidation from House Democrats as both chambers wanted to make sure the plan to remove the pension tax was fiscally sound.

“We want to make sure that we will be prepared so … these seniors, if they’re going to see relief, we’re not going to pull the rug from under them in a couple of years,” Cavanagh said.

Sen. Kevin Hertel, D-St. Clair Shores, is the sponsor of the pension tax repeal out of the Senate. Changes to his iteration on Thursday made the bill includes public pension, private pensions, 401ks, IRAs and annuities.

He said that while the bill has colloquially gone by many names in recent weeks, being referred to as a “retirement tax” or pension tax repeal, what it truly offered was “immediate relief for seniors” who had to downsize homes or receive a lesser quality of medical care after their pensions were effected.

“A choice without viable options is not a true choice, and that is a position we have put seniors across this state in. … This bill only creates more winners,” Hertel said. “No one’s taxes will go up as a result of this legislation – and let’s be clear: Winners and losers were picked in 2011 when corporations won and retirees across our state lost.”

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House and Senate Republicans have not altered their plans since first unveiling them in early January.

A portion of the Republican plan features a deduction that applies to all senior income and would increase based on annual inflation.

This would mean:

  • Beginning in the 2023 tax year for a person born after 1945 – between the ages of 62 and 66 years old – those individuals can exempt the first $20,000 on their income from tax if they are a single filer.
  • That would figure double for those filing jointly to $40,000.
  • Michiganders 67 and older, starting in the 2023 tax year, would be able to exempt even more under Republicans’ plan.
  • Single filers could exempt their first $40,000 of income while joint filers could deduct $80,000.

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