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Michigan deduction and recapture rules are modified

(December 1, 2004) - The Michigan legislature and governor have approved HB 5534, making changes to the state income tax deduction for contributions to MESP and related recapture rules.

Where prior law provided that a deduction is no longer allowed in the year of qualified withdrawal or any subsequent year, the amendment now permits the deduction in any year (capped at $5,000 single filer and $10,000 joint filers) for contributions reduced by any qualified withdrawals during the year.

Nonqualified withdrawals result in Michigan recapture of the deductions, but only to the extent the nonqualified withdrawals exceed the amount of contributions never deducted (i.e. those in excess of the annual deduction cap).

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