Pre-2012 Michigan Tax Treatment of Retirement Distributions
Before Public Act 38 of 2011 (PA 38), taxpayers could subtract most qualified retirement distributions on the Michigan return, to the extent included in AGI, with some dollar limitations on distributions from private employers, certain public employers from other states, and on qualified distributions from individual plans such as IRAs, self-employed plans, and senior citizen annuities. The subtraction applied in full to federal and Michigan public retirement benefits, including benefits from political subdivisions of Michigan, as well as military retirements, and Tier 2 railroad retirements. Tier 1 railroad retirement benefits were taxable at the federal level as Social Security and were subtracted on the Michigan return in the same way as Social Security, to the extent included in AGI.
A private retirement benefit maximum applied to qualified distributions generally from individual IRAs, private employer retirement plans, plans for self-employed people, and qualified senior citizen retirement annuities. MCL 206.30(1)(f)(iv). The amount and nature of this maximum varied over time, but beginning in 2007, the maximum was $42,240 for single returns and $84,480 for joint returns, and it has been indexed for inflation each year since 2008. In addition, the maximum had to be reduced by certain income. This RAB refers to this subsection 30(1)(f)(iv) provision as the “ private retirement maximum ” or “ private retirement benefit maximum ”. Individuals with retirement income from both public and private sources were required to reduce the maximum allowable subtraction for the private plan benefits by any public retirement benefits subtracted.
Public retirement benefits from other states were generally limited to the lesser of the private retirement maximum or the amount allowed as a deduction or exemption by the other state to its residents on benefits received from Michigan. Fourteen states allowed a full deduction or exemption for their residents receiving Michigan public retirement benefits, and, therefore, Michigan allowed a reciprocal full subtraction of public retirement benefits received from those states by Michigan residents, up to the private retirement maximum.