In late May, the Michigan legislature voted to make dramatic changes to Michigan’s corporate and individual income tax laws. The measure repeals the Michigan Business Tax and eliminates numerous individual income tax credits, deductions and exemptions as well as changes future income tax rates.
New Corporate Income Tax
As of January 1, 2012, the Michigan Business Tax will be replaced with a corporate income tax imposed only on businesses organized as C corporations. Sole proprietors and pass-through entities would not be required to pay taxes or file returns under the new corporate income tax, and the new tax structure will also not apply to insurance or financial institutions.
Corporations will experience a rate of 6 percent of the income tax base, after allocation and apportionment. Taxpayers would not file a return for liability less than $100. Smaller corporations that had apportioned gross receipts of less than $350,000 under the Michigan Business Tax structure are still exempt from filing – the new corporate income tax contains a similar exemption.
Michigan’s new corporate income tax retains the alternative tax credit for taxpayers with gross receipts of $20 million or less and adjusted business income of $1.3 million or less. No other tax credits offered under the Michigan Business Tax were retained.
New Individual Income Tax
Michigan legislators postponed one future income tax reduction and postponed additional reductions in individual income taxes. A scheduled reduction from 4.35 to 4.25 percent was originally scheduled to be effective October 1, 2011, but will not occur until January 1, 2013. Four additional .1 percent reductions that had been slated for years 2012-2015 will not occur.
The legislation also fixed the personal exemption for tax payers and each dependent at its current level, $3,700, through tax year 2012. However, beginning in 2013, the exemption will adjust annually for inflation. The standard personal exemption for single and married taxpayers will be phased out based on household resources. The additional exemptions are eliminated for taxpayers 65 and older as well as taxpayers receiving unemployment compensation in excess of 50 percent of their adjusted gross income. Several other deductions have also been eliminated, such as political contributions, distributions from certain retirement accounts to pay for education expenses, and charitable contributions made from a qualified retirement account. The $600 exemption per child under age 19 is also eliminated.
Exemptions for retirement and pension income also change based on the year the taxpayer was born.
Due to these dramatic changes to the corporate and individual tax laws in Michigan, taxpayers living or doing business in Michigan may wish to discuss the implications with their tax professional and make changes.