Kiplinger Personal Finance Magazine has released its 2010 update of the The Most (and Least) Tax-Friendly Places to Retire. As in prior Kiplinger reviews, Michigan continues to rank very well as a retiree-friendly, low tax state:

Best: No. 3, Michigan
State income tax: 4.35%
State sales tax: 6%
Inheritance tax: No

The Great Lakes State offers generous retirement-income exemptions from state income tax. It does not tax Social Security or military, federal, state- or local-government pensions. Private pensions are exempt up to $45,120 for individuals and up to $90,240 for married couples filing jointly. (However, these private-pension exemptions are reduced by any public-pension deduction that you claim.) The state’s flat-rate income tax is scheduled to gradually decline to 3.9% by 2015. Food and prescription drugs are exempt from state sales taxes.

And this does not even include the even greater tax benefits retirees enjoy if they locate to a tax free Renaissance Zone.

Here’s Kiplinger’s complete 2010 rundown on Michigan’s retirement tax rates:

The Great Lakes State offers generous retirement-income exemptions. It does not tax Social Security, military, federal, or state- and local-government pensions. Private pensions are exempt up to $45,120 for individuals and up to $90,240 for married couples filing jointly. (However, these private-pension exemptions are reduced by any public-pension deduction that is claimed.) The state imposes a flat-rate income tax of 4.35% (scheduled to gradually decline to 3.9% by 2015). Michigan has a 6% statewide sales tax, but food and prescription drugs are not taxed. Property in Michigan is generally assessed at 50% of its cash value. Some seniors may be able to delay paying property taxes, depending on their income level and county of residence, and they may be exempt from a portion of the local school tax. There is no inheritance tax, and the estate tax is limited to federal estate-tax collection.

STATE SALES TAX
6%. Food and prescription drugs are exempt; home heating fuels are taxed at 4%.

INCOME-TAX RANGE
Flat rate of 4.35% of federal adjusted gross income with modifications (scheduled to decline gradually to 3.9% by 2015); some cities impose additional income taxes. Effective October 1, 2011, the rate will be reduced by 0.1% each year for the next four years until the tax rate is 3.95%. Beginning October 1, 2015, the rate is 3.9%.

EXEMPTIONS FOR RETIREMENT INCOME
Social Security and military, federal and state/local government pensions are exempt. Private pension income is exempt up to $45,120 (individual filers) or $90,240 (married filing jointly). These private pensions are reduced by the amount of any public pension deduction claimed. Taxpayers 65 or older may deduct interest, dividends and capital gains up to $10,058 (individual filers) or $20,115 (married filing jointly). These deductions are reduced by any pension exemption taken. Federal and Michigan public pensions are totally exempt. Public pensions include benefits received from the federal civil service, State of Michigan public retirement systems and political subdivisions of Michigan, military retirement and Tier 2 railroad retirement. If the conditions of the plan under step one are met, then these payments are totally exempt from Michigan income tax. Michigan residents can treat public pensions received from the following states as totally exempt: Alaska, Florida, Hawaii, Illinois, Massachusetts, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington and Wyoming. Michigan residents who receive public pensions from other states are subject to the private-pension exemption limits.

PROPERTY TAXES
Property in Michigan is generally assessed at 50% of its true cash value. Some seniors, disabled persons, veterans, surviving spouses of veterans and farmers may be able to delay paying property taxes, depending on the county of residence and income level. Homeowners may be exempt from a portion of local school taxes under the Homeowner’s Principal Residence Exemption Program, formerly known as the Michigan Homestead Exemption Program. It allows homeowners an exemption from their local School Operating Millage. Homeowners that occupy their property as their principal residence may exempt up to 18 mills. A homestead property-tax credit is available to homeowners or renters. The credit is based on the property tax on a homestead that is subject to local property taxes or household income. Only those whose household income is less than $82,650 are eligible.

INHERITANCE AND ESTATE TAXES
There is no inheritance tax, and there’s a limited estate tax related to federal estate-tax collection.