Michigan taxes to fall for seniors, low-income earners. How much will you save?

• Michigan Gov. Gretchen Whitmer on Tuesday celebrated the start of a four-year plan to repeal a state ‘retirement tax’
• Whitmer also plans to send refund checks to lower-income households that qualify for the Earned Income Tax Credit
• A temporary income tax rate reduction will benefit all filers, but Whitmer has already allowed the rate to rebound

Jan. 31: When to file Michigan state taxes and what's new in 2024

LANSING — Gov. Gretchen Whitmer posed behind a giant prop check on Tuesday as she reminded seniors they'll begin to see at least some savings this year as the state begins to repeal its so-called retirement tax.

The exemption on retirement income, which reverses a 2011 change and will be phased in over four years, is among three major tax policy changes that will benefit Michiganders filing personal income taxes by this year’s April 15 deadline.

The second-term Democrat announced last month that the state will soon begin sending actual refund checks to lower-income taxpayers who qualify for the expanding Earned Income Tax Credit.

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Savings for other residents will likely be short-lived, however, as the Whitmer administration allows a broad cut in the personal income tax rate to expire this year despite Republican claims it should be permanent. 

Here’s information about each of the changes:

'Retirement tax’ repeal

What to know: Under the new law, Michigan will begin phasing out a 2011 “retirement tax” over four years. Once fully implemented in the 2026 tax year, most forms of retirement income — including pensions, 401k and IRA withdrawals — will again be fully exempt from the state’s personal income tax rate, Deputy Treasurer Jeff Guilfoyle told Bridge on Tuesday. 

Who saves, how much? The administration estimates 500,000 Michiganders will eventually benefit from the retirement income exemption, with an average savings of $1,000. The phase in will begin for the just completed 2023 tax year, Guilfoyle said, meaning Michiganders with retirement income will begin to see at least some savings when filing by April.

Learn more: While the phase in schedule and formula are both complicated, the Michigan Treasury has prepared documentation and a video explaining who and how to benefit from the retirement tax repeal. 

Earned Income Tax Credit expansion

What to know: The new law expands Michigan's Earned Income Tax Credit for lower-income workers from 6 percent to 30 percent of the federal version. The state rate had been 20 percent of the federal version before it was cut as part of the 2011 tax code rewrite approved by then-Gov. Rick Snyder.

Those savings were supposed to begin with the 2023 tax year, but the Whitmer administration last month announced plans to send out refund checks for the 2022 tax year to effectively apply the expansion retroactively. 

Who saves, how much? The new law will benefit roughly 700,000 lower-income households who have already qualified for the EITC. Refund checks for 2022 are expected to average about $550 and will be mailed out automatically next month. 

The savings will continue in future years under the expanded EITC, which is designed to benefit residents who have a job but don't make much money. The size of the credit depends on household income and dependent children.  

For the 2022 tax year, a married couple with three kids qualified if they earned less than $59,187 combined. Individuals without children could qualify if they earned less than $16,480. 

Learn more: The Michigan Treasury has created a new website and video to explain the Earned Income Tax Credit expansion. 

Temporary income tax cut, rebound bump

What to know: Soaring tax revenues last year triggered an automatic cut in the state's income tax rate, which dropped from 4.25 percent to 4.05 percent. But in an interpretation decried by Republicans, who wrote the trigger into a 2015 road funding law, Attorney General Dana Nessel and Treasurer Rachel Eubanks determined the cut was temporary and only applied to the 2023 tax year. So the rate goes back to 4.25 percent for earning in the current tax year. 

With the help of the Mackinac Center for Public Policy, two GOP state lawmakers sued over the Whitmer administration interpretation, arguing the income tax rate was supposed to be permanent. Court of Claims Judge Elizabeth Gleicher disagreed, ruling late last month that the triggering law was "unambiguous" and only mandated a one-year tax cut. Plaintiffs plan to appeal. 

Who saves, how much? Anyone who pays personal income taxes will see the rate reduction reflected in their 2023 tax filing, which is due in April, but the rate will rebound for next year’s filings on income earned throughout 2024. 

Michigan has a flat income tax rate, meaning dollar-by-dollar savings from the temporary cut will be larger for larger earners. Likewise, big earners will see the biggest tax increase as the rate goes back up.

An individual filer who makes $50,000 will save about $60 for 2023 but will see their future bills go back up by that same amount. An individual filer who makes $500,000 will save about $960 in 2023 taxes but pay that much more in future years.

Learn more: Read Nessel's legal opinion that made the tax cut temporary despite GOP arguments it should be permanent