Tax Legislation 2012

There’s a new governor in town and he’s changed the tax law significantly. The Michigan Business Tax (MBT) has been eliminated and will be replaced with the Corporate Income Tax (CIT) and additional taxes on pensions. With these changes taking effect January 1, 2012 it’s important to rethink your tax strategy now. The CIT is a compilation of three separate taxes: a corporate income tax, a premiums tax on insurance companies, and a franchise tax on financial institutions. A key component of the CIT is that it only applies to C-corporations. If you own a C-corp you may want to consider switching to an S-corporation. If you do choose to make the switch you must do so by March 15, 2012 in order to avoid the 6% CIT. But remember, there are other things to consider before switching to an S-corp such as individual tax rates and built in gains tax and loss carry overs.

It is also important to understand that under the CIT the only credit available will be the small business alternative credit. You’ll want to keep this in mind when your planning for your taxes. Since this is the
last year for the MBT you’ll want to plan to reduce your 2011 MBT tax as much as possible. Consider all of your options including moving income to 2012 or deductions to 2011 (especially if you are eligible for the small business credit).
In addition to the MBT/CIT changes there are significant adjustments due to take effect regarding retirement benefits and pensions. Taxpayers will now be split into three categories based upon the year they were born. For those filing jointly, the age of the oldest spouse will determine in which category both spouses retirement benefits and pensions will be taxed. The three categories are: those born before 1946, those born between 1946 and 1952, and those born after 1952. Taxpayers born after 1952 will be most affected by additional taxes on pensions.

Once you have carefully reviewed the new legislation, it’s important to rethink your tax strategy to reap the most reward. For example, if you own a vacation home in a state with no income tax you may want to consider switching your resi- dency. To do this, you must live in a state for over 183 days and be able to prove you are a resident. No single factor can determine residency (rather it’s determined by the weight of the evidence presented) but things such as lo- cation of possessions, voting rights, and auto licensing factor into the decision.

One last key thing to understand about these new laws is that they continue to be changed as they are finessed. We highly encourage you to consult with an H&S professional when considering your tax strategy for 2012. We are staying up-to-date on the changes and will be able to help you come up with the best plan to suit your needs.

For more information please contact H&S at (231) 924-4088.