This state wants its residents to pay less in retirement tax

Michigan residents may end up paying less in tax on their retirement benefits. 

The state’s Senate Committee on Finance, Insurance and Consumer Protection has pushed forward a proposal, introduced by Sen. Kevin Hertel, to reduce what retirees pay in taxes on their benefits. 

Under current law, which was enacted in 2011, taxpayers with retirement or pension benefits face restrictions on the deductions they’re allowed. If passed, this proposal would lighten those limitations in an effort to unburden older Americans living on a fixed income and relying on their retirement plans and pensions.

Such an act would save half a million Michigan households about $1,000 each year, Gov. Gretchen Whitmer said in her State of the State address on Wednesday. “That’s money for prescriptions, groceries, gas or gifts for grandkids,” she said. “I fought this tax as a legislator and as governor because I knew it hurt people.”

The deduction would be based on the year a taxpayer was born. The amount of the deduction allowed would increase each year going forward, according to the Senate Fiscal Agency’s bill analysis. The result of the bill would be a $39 million reduction in General Fund revenue in the 2022-2023 fiscal year and a $175 million reduction the following year. By fiscal year 2026-2027 when the law would be fully phased in, the revenue loss would likely pass $500 million, the report found.  

Where a person lives in retirement can make a significant difference when financial planning. Some states do not tax any retirement benefits, while others may tax withdrawals from IRAs and employer-sponsored plans but not pensions. States are also divided on whether they tax Social Security benefits. Eight states charge no income tax, including on Social Security benefits, according to an AARP analysis.