Moving to Michigan

A Michigan resident is someone domiciled in Michigan: the state holds the fixed, permanent home to which you always intend to return, whatever temporary address you happen to be at. Domicile does not change when you spend the winter in Florida or take a two-year assignment in Texas; it changes only when three things all happen, you intend to abandon the old home, you intend to acquire a specific new one, and you are physically present in the new state. The statute adds a backstop: anyone who lives in Michigan for at least 183 days of the year is treated as a resident whatever they intend. The year you move, you file the MI-1040 with Schedule NR as a part-year resident, reporting the income you earned while living here plus any Michigan-source income from the other months, and you prorate the $5,900 exemption by the share of your income that is Michigan income. Wages are the simple part for most movers, because Michigan has reciprocal agreements with all four of its neighbors and two more states besides: a resident of Illinois, Indiana, Kentucky, Minnesota, Ohio or Wisconsin who works in Michigan owes Michigan nothing on wages, and a Michigan resident working in those states owes only Michigan.

Two things make a Michigan move different from most. First, the state has no itemized deductions, so the question of which state gets the mortgage interest and property tax never arises. Second, the move comes with property-tax paperwork that does not exist in most states: the Principal Residence Exemption to claim at the new house, the rescission to file at the old one, and the “uncapping” that resets the new house’s taxable value and raises the bill the seller’s records never showed.

Resident, nonresident, part-year

A full-year resident reports all income from everywhere and claims a credit on MI-1040 line 18 for income tax paid to another state on income Michigan also taxes. A resident may also subtract net business income and net rents or royalties from property in another state on Schedule 1, line 13; wages earned in another state cannot be subtracted and go through the line 18 credit instead.

A nonresident reports Michigan-source income only: wages for work physically performed in Michigan (unless the reciprocal agreement applies), rents and royalties from Michigan property, gains on the sale of Michigan real estate or tangible property, income from a business carried on in Michigan, and Michigan lottery, casino and racetrack winnings. Interest, dividends and pensions received by a nonresident are not Michigan income, whatever their origin. An out-of-state student living here for school is a nonresident.

A part-year resident is both in one year: a resident for the months here, a nonresident for the rest. Income is allocated by the date it was received, with one exception the Department enforces: bonuses, severance and other pay that accrued while you were a resident are Michigan income no matter when they arrive. A part-year resident who lived here at least six months may also claim the Homestead Property Tax Credit, prorated.

Domicile, and the 183-day rule

The Department’s bulletin on residency, RAB 2002-5, defines domicile as “the fixed, permanent and principal home to which a person, wherever temporarily located, always intends to return.” You can have several residences but only one domicile. Once established it is not lost until all three elements of a change are present, and the burden of proving the change is on the person claiming it. The facts that carry weight are the ordinary ones: where your driver’s license and voter registration are, where your cars are registered, which house has the Principal Residence Exemption or its equivalent, where your doctor, church and family are, where your mail goes, and how many days you spent in each place. None is decisive alone. A Michigan taxpayer who qualifies for the federal foreign earned income exclusion while working abroad is still a Michigan resident unless he can prove domicile elsewhere.

The statutory backstop is MCL 206.18, which treats a person who lives in Michigan at least 183 days of the year as a resident. The practical case is the retiree who moves domicile to Florida or Arizona but keeps the Michigan cottage and spends the summers there. Spend 183 days or more in Michigan and the Department can tax the year as a resident regardless of the Florida license. Keep a calendar.

The part-year return: Schedule NR

Schedule NR has two columns, total income and Michigan income, line by line. Wages go in the Michigan column for the period of residence plus any Michigan work in the nonresident period. Interest and dividends are allocated by date of receipt; pension and IRA payments by date of receipt, then subtracted on Form 4884 like a resident’s to the extent they qualify; a capital gain belongs to Michigan if you were a resident on the date of sale or the property was in Michigan. The exemption allowance is prorated by the ratio of Michigan income to total income, so a couple with half their income in Michigan gets half of $11,800. Michigan income less the prorated exemption is taxable income, times 4.25%. Withholding reported on Schedule W must be Michigan withholding; the other state’s withholding goes on the other state’s return.

Reciprocity: wages and only wages

Michigan’s agreements with Wisconsin (1967), Indiana and Kentucky (1968), Illinois (1971), Ohio (1972) and Minnesota (1984) cover compensation for personal services, meaning salaries, wages and commissions as an employee. A Toledo resident working in Monroe pays Ohio only; a Michigan resident commuting to South Bend or Chicago pays Michigan only. The agreements do not cover independent contractors, business income, rental income, gambling winnings, gains on property, or city income taxes. A Wisconsin resident with a rental in the Upper Peninsula files a Michigan nonresident return for the rent; an Ohio resident who works in Detroit pays no Michigan tax on the wages but does owe Detroit’s 1.2% nonresident tax, since the agreements are between states, not cities.

Stopping the withholding is the employee’s job. Michigan issues no nonresidency certificate; a reciprocal-state resident gives the Michigan employer a signed statement of name, home address and Social Security number declaring the address to be the legal residence, which the employer keeps as its authority not to withhold, and the MI-W4 exemption line serves the purpose. A Michigan resident working in a reciprocal state asks that employer to withhold Michigan tax voluntarily; if it will not, the resident makes Michigan estimated payments once the expected liability passes $500. If Michigan tax was withheld in error from a reciprocal-state resident, the only way to get it back is to file an MI-1040 with Schedule NR showing zero Michigan wages.

The credit for tax paid to another state

A Michigan resident with income taxed by a non-reciprocal state, a city outside Michigan, the District of Columbia or a Canadian province claims a credit on MI-1040 line 18 for the tax paid there, limited to the Michigan tax on the same income, and attaches the other return. The limit means the credit never exceeds 4.25% of the income: a resident who pays 6% to another state on $50,000 of consulting income gets a $2,125 Michigan credit against $3,000 paid, and the extra $875 is simply the price of earning it there. The credit is for income tax, not for property, sales or payroll taxes, and a reciprocal state’s tax on wages earns no credit because none should have been paid; file there for a refund instead. For Canadian provincial tax the credit is limited to the provincial income tax not already claimed as a federal foreign tax credit (verify).

Remote work across the line

Michigan taxes a nonresident on wages for work physically performed in Michigan, and the Department has said so in the plainest terms for telecommuters: a nonresident working from a Michigan location owes Michigan tax on those wages, and a nonresident working from outside Michigan for a Michigan employer does not, apart from the reciprocal states, whose residents owe Michigan nothing on wages either way. Michigan has no “convenience of the employer” rule that would tax a remote worker on where the employer sits. The consequences run both ways. An Ohio or Indiana resident who works from home for a Grand Rapids company owes nothing to Michigan or to Grand Rapids. A Michigan resident who works from a Michigan home office for a Chicago employer owes Michigan on all of it and Illinois nothing, under reciprocity. A Michigan resident who works from home for a New York employer owes Michigan on all of it and may also face New York’s convenience rule, with the line 18 credit covering only up to 4.25% of the doubly taxed wages. And a nonresident who commutes into Detroit three days a week owes the 1.2% city tax on three-fifths of the wages, which is why a log of days worked in and out of the city matters.

Retirees moving in or out

Federal law since 1996 bars any state from taxing the retirement income of a former resident, so a pension earned in another state and paid to a new Michigan resident is Michigan’s to tax, and Michigan subtracts it up to the cap on Form 4884 and subtracts Social Security in full. A retiree moving in gets Michigan’s rules from the first day of residence; a retiree moving out stops owing Michigan on the pension the day the domicile changes, and the new state’s rules take over. In the move year the 1099-R is split by date of payment on Schedule NR. The retiree who leaves but keeps a Michigan house should rescind the Principal Residence Exemption on Form 2602 within ninety days, or face a penalty and a back-tax bill when the assessor finds it, and should watch the 183 days. The rules themselves are in Michigan for retirees.

The property-tax paperwork

Three things happen to a Michigan house when it changes hands, and none is on the income tax return.

• Uncapping. Under Proposal A, a home’s taxable value can rise no faster than inflation or 5% a year while the same owner holds it. On a sale it resets to the state equalized value, half of market value. A buyer who budgets from the seller’s tax bill will be short; ask the assessor for the post-sale estimate.
• The Principal Residence Exemption. File Form 2368 with the city or township assessor to remove up to 18 school operating mills from the new home. Filed by June 1 it applies from the summer bill; filed by November 1, from the winter bill. The assessor may grant it retroactively for the current and three prior years if the deadline was met each year.
• Rescission at the old house. Within ninety days of moving out, file Form 2602 to rescind the exemption at the former home. A seller who buys before selling may keep the old exemption up to three years under a conditional rescission if the old home is listed, vacant and not rented (verify).

The year you move: a checklist

• Record the moving date. Everything on Schedule NR turns on it.
• Get a Michigan driver’s license, register the cars and register to vote within the first weeks; these are the facts an auditor in either state will ask for.
• Give the new employer an MI-W4 claiming $5,900 exemptions, and the old employer notice to stop the former state’s withholding if you still work for it remotely.
• If you commute to or from a reciprocal state, give the employer the residency statement so the right state withholds.
• Ask each pension payer for a new MI W-4P; most pension income is subtracted here, so Michigan withholding is often unnecessary.
• File Form 2368 at the new house and Form 2602 at the old one.
• Find out whether the new address, or the new employer, is in one of the twenty-four cities with an income tax. Detroit’s return is filed with the state; the others are filed with the city.
• If you expect to owe Michigan more than $500 beyond withholding, start MI-1040ES payments at the next quarterly date.
• Keep the other state’s return; Michigan wants a copy if you claim the line 18 credit.