Townsend Retirement Tax Reform Would Prevent Tax Increases on Surviving Spouses

“I view this legislation as resolving an unintended consequence that can occur in the course of developing public policy,” said Townsend, who serves as the minority vice chairman of the House Tax Policy Committee. “It appears to be an oversight in the drafting process that needs to be resolved, I don’t think the intent was to increase taxes on retirees who have lost their significant other.”

Townsend said he first discovered the issue during a town hall meeting in 2012 after the retirement tax had been signed into law. Upon learning that surviving spouses would be subject to tax increases as the result of losing their loved one, Townsend drafted legislation to resolve the issue.

Under current law, for married couples who file joint tax returns, the age of the older spouse determines the tax category that will apply to the pension and retirement benefits of both spouses, regardless of the age of the younger spouse.

“I think it is important that we resolve this issue for surviving spouses who may encounter this issue,” said Townsend. “The last thing anyone needs is to sit down with their accountant and have to be reminded of a loved one they are grieving.”

In the event that the older spouse passes away, in most cases the surviving spouse would experience a tax increase on retirement income if the:

1. Older spouse was born before 1946 and the surviving spouse was born after 1945.

2. Older spouse was born before 1953 and the surviving spouse was born after 1952.

Under current law, if the older spouse was born:

1. Before 1946 and the surviving spouse was born between 1946 and 1952:

The surviving spouse would go from being grandfathered out of the retirement tax to receiving a $20,000 single exemption on his/her retirement income. When the surviving spouse turns 67, the exemption is against all types of income, including investments, salary and wages.

1. Before 1946 and the surviving spouse was born after 1952:

The surviving spouse would go from being grandfathered out of the retirement tax to receiving no exemption on his/her retirement income. At the age of 62, the surviving spouse is eligible for a $15,000 single exemption on his/her retirement benefits from government agencies not covered by Social Security. When the surviving spouse turns 67, he/she may elect to receive a $20,000 single exemption against all types of income or the Social Security and personal exemptions.

1. Between 1946 and 1952 and the surviving spouse was born after 1952:

The surviving spouse would go from receiving a $40,000 joint exemption against retirement income (all types of income if deceased spouse was 67 or older) to receiving no exemption on his/her retirement income. At the age of 62, the surviving spouse is eligible for a $15,000 single exemption on his/her retirement benefits from government agencies not covered by Social Security. When the surviving spouse turns 67, he/she may elect to receive a $20,000 single exemption against all types of income or the Social Security and personal exemptions.

Rep. Townsend’s legislation reforms the retirement tax to ensure surviving spouses are not subject to a tax increase as a result of the loss of their loved one.

Under the legislation, surviving spouses can continue to receive the same tax rate, limitations, and restrictions so long as they have field a joint return in the past with their spouse and have not remarried during the tax year they are filing for.

Townsend said it is not uncommon for a spouses to have eight or more years difference between them, adding that current law has a profound impact on surviving spouse who are born after 1952 when the deceased spouse was born before 1946.

“For instance, a widow born after 1952, whose husband was born before 1946, under current law, with $50,000 of retirement income, would go from paying no taxes to paying up to $2,125 in taxes,” said Townsend. “According to accountants I’ve spoken with, they have already had clients negatively impacted by this issue.”

The bill is a reintroduction of HB 4301 from last session, which received broad bipartisan support when it was voted out of the House Tax Policy Committee on Dec. 3, 2014 (10-0-3).

The legislation will likely be referred to the House Tax Policy Committee, where Townsend serves as the minority vice chairman.

The bill has bipartisan backing. Democratic co-sponsors are Reps. Henry Yanez (D-Sterling Heights), Wendell Byrd (D-Detroit), Fred Durhal III (D-Detroit), Frank Liberati (D-Allen Park), Bill LaVoy (D-Monroe), Sheldon Neeley (D-Flint), David Rutledge (D-Superior Township), Sarah Roberts (D-St. Clair Shores), Jeff Irwin (D-Ann Arbor), Christine Greig (D-Farmington Hills), John Chirkun (D-Roseville), Derek Miller (D-Warren), Jeremy Moss (D-Southfield), Robert Wittenberg (D-Oak Park), Kristy Pagan (D-Canton) and Winnie Brinks (D-Grand Rapids).

Republican co-sponsors are Rep. Pat Somerville (R-New Boston), Tom Barrett (R-Potterville), Tim Kelly (R-Saginaw Township), Potvin (R-Cadillac), Ed McBroom (R-Vulcan), Lee Chatfield (R-Levering), Klint Kesto (R-Commerce Township), Gary Glenn (R-Midland), Jason Sheppard (R-Temperance), Holly Hughes (R-Montague), Dave Pagel (R-Oronoko Township), Tom Hooker (R-Byron Center) and Roger Victory (R-Hudsonville).