Michigan Homestead
Property Tax Credit is a Joke?
© 2000,2001 by Brian Mork

Unless you buy a house with a retail value of 10x (or more) of your annual income, the Michigan Homestead Tax Credit for you is zero.  Nada.  No dollars.  Ouch.

Do you know anybody who owns a house worth ten times their annual income?  Who makes $40,000/yr and buys a $400,000 house?  Please take the time to email any errors I'm making. Or, if I'm making no errors, consider letting your legislators know that you'd appreciate a tax credit that's more substance and less political.  I know a lot of people have accountants do taxes and might not be aware of this situation.  But it bugs me that such a ballyhoo is raised about some credit when, in reality, it amounts to a sham.

Spring 2000, I glibly accepted the outcome of the torturous calculations on my Michigan state income tax form.  One unhappy result is that I could claim no Property Tax Credit.  Since the Real Estate industry points this out as a owner's advantage, and there's all sorts of coercive pressure to get the invasive forms turned in prior to a deadline or else risk loosing the credit, I was disappointed.  Life went on, and I forgot.  Until...

More recently, a School Board of Education bond initiative may significantly raise my property taxes (0.282% to 0.700%).  They point out the potential savings of the Michigan Homestead Property Tax Credit as a mitigation to the 150% increase in taxes for the schools.  When their example showed the savings for a person making just under $16,000 per year (below Federal poverty level), it made me curious enough to look at the numbers deeper.

This web page strips away all the "copy line X to line Y" tax form filing verbiage, and the associated regulations (not laws?) that dictate the forms.  Incidentally, I do feel sorry for the people who have to turn regulation into usable forms!

Here are the brutal calculations, straight from the Michigan M-1040CR form.  Taxes (T) would be 0.7% of my home's taxable value (TV), which is nominally 50% of the street price (P).  A home owned for a long time may have a TV slightly less because the TV increase rate is limited by the rate of inflation, whereas the state equalized value (SEV) -- roughly the "street price"-- has been driven up in most areas by a hot real estate market.  But mostly, T=0.0035P.

However, just like that pesky 2% floor on Federal Miscellaneous Deductions, the Michigan Property Tax Credit has a floor (F): 3.5% of your income (I).  So, F=0.035I.

For you to get any credit, taxes must exceed the floor.  The balance point is when they're equal:
T=F, or 0.0035P = 0.035I  (We've ironically reached the place where True=False). Harking back to the pre-college algebra yields a P/I ratio equal to 10.  In other words, the price of your house must be 10x your annual income to break even.  Earn more, the credit is still worth nothing.  Buy a bigger house, the credit will be worth some money.

And for the special people (of which I've been one, so I checked the details):
There is a M-1040CR-2 form, for (some) Veterans and blind people that gives (slightly) better tax credits.  Old timer vets, disabled vets, pensioned vets.  Or active military.  Reservists are "active military" in this sense (if you're military and reading this, remember the legislative crowd writes regs from their perspective, not yours).  It may be superfluous anyhow since the form says "[if] your household income is more than $7,500, you cannot claim a credit on this form."  You think I misquoted that number?  No, I didn't.  But if you're blind, disabled, or a surviving spouse, look again.  You may yet get some credit, coarsely based on the ratio of your taxes (T, above) divided by your home's taxable value (TV, above).  Expect about $25 credit max.

A friendly challenge:
The stated maximum credit is $1200.  Please send me a scenario describing the hypothetical person that could claim that much credit.  To be fair, many people pay more than 0.7% taxes and that makes the ratio less threatening.  "Pay more taxes so you can get the credit."  Hmm... now that sounds like a possible new law!

This page is maintained by Brian Mork. It was last modified October 2001. Suggestions for changes and comments are always welcome. The easiest way is to contact me via e-mail.