Governor Snyder signed a tax reform bill into law on May 26, 2011, that will result in the income taxation of certain retirement income, reducing the favorable exemption from taxation previously afforded to most retirement income under Michigan law. Though the change is technically a reduction in an exemption, for many people the end result is the same as a tax increase. 

Changes of interest to seniors and other older people regarding the new Michigan income tax law include the following. 

The individual income tax rate is set at 4.35% until January 1, 2013. Then, it will be set at 4.25 %. 

In regards to retirement income, there is a three-tiered approach under the new law, the application of which will determine whether or not retirement income is taxed. 

First, people born prior to 1946 (age 67 or older as of December 31, 2011) will continue to receive the current retirement income exemptions, the personal exemption, Social Security exemption and the exemption for dividends, interest, and capital gains. 

Second, individuals born between 1946 and 1952 (age 60 to 66 as of December 31, 2011) will have a $20,000 single and $40,000 married joint retirement income exemption, which is in addition to the personal exemption and Social Security exemption until age 67. At age 67 and after, they will receive a $20,000 single and $40,000 married joint senior exemption against all income, in addition to the personal and Social Security exemptions. 

Third, taxpayers born after 1952 (age 59 or younger as of December 31, 2011) will receive the personal exemption and Social Security exemption until they turn age 67. At age 67 and after, they will have a choice of either (1) a $20,000 single and $40,000 married joint senior exemption against all income, or (2) the personal and Social Security exemptions. 

This is quite a negative change for the last group. During the sustained recession in Michigan in the last 10 years, many people in their fifties were forced to take an early retirement due to their employer downsizing. Due to the early retirement, they will receive less in retirement benefits then if they had been able to continue to keep working until age 65 where they and their employer could have continued to contribute to their retirement plans. Now, under the new law, more of their retirement income will be subject to income tax.