Are Pensions and Retirement Income Taxed in Michigan?

Michigan does tax most forms of retirement and pension income. The state, however, provides deductions that can reduce or even eliminate this tax liability for many retirees. The extent of these deductions is not uniform and depends on a variety of factors, creating a complex system for taxpayers to navigate. Understanding your eligibility for these tax benefits is a part of financial planning in retirement.

Michigan’s Pension Tax Rules by Birth Year

Michigan’s approach to taxing retirement income is structured around a taxpayer’s date of birth, a system that has undergone changes. Historically, the state used a “three-tier” system. Taxpayers born before 1946, or Tier 1, received the most favorable treatment, with the ability to deduct large amounts of private retirement income and fully exempt all income from government pensions.

Retirees born between 1946 and 1952 fall into Tier 2. This group faced more restrictive rules, with a standard deduction capped at $20,000 for single filers and $40,000 for joint filers. Those in Tier 3, born after 1952, historically had the most limited options. Before reaching age 67, most of their retirement income was fully taxable by the state.

The passage of Public Act 4 of 2023 initiated a multi-year phase-out of the tiered system. This law provides a new deduction option that is gradually expanding to all retirees. For the 2024 tax year, taxpayers born between 1946 and 1962 can choose to deduct 50% of the Tier 1 maximum deduction amounts. For the 2025 tax year, this deduction increases to 75% and expands to include those born through 1966.

By the 2026 tax year, all retirees, regardless of birth year, will be able to claim the same deduction as Tier 1 retirees. This is not a complete exemption of all retirement income. The deduction is subject to annual inflation-adjusted caps. For example, the 2023 caps on private retirement income were $61,518 for single filers and $123,036 for joint filers.

Qualifying Retirement and Pension Income

Qualifying retirement and pension benefits include most common sources of post-employment income. This encompasses distributions from employer-sponsored defined contribution plans, such as 401(k), 403(b), and 457 plans. Payments from traditional defined-benefit pension plans, which promise a specific monthly income in retirement, also qualify.

This applies to pensions from both private sector employers and public employment. Distributions from individual retirement arrangements (IRAs) and annuity payments that are part of a retirement plan are also eligible.

Military retirement benefits are fully deductible and are not subject to the same limitations as other pension income. Similarly, benefits received under the federal Railroad Retirement Act are also fully exempt from Michigan income tax.

Social Security benefits are completely exempt from Michigan income tax. This exemption applies to all residents, regardless of their age, income level, or which tax tier they fall into. Therefore, Social Security payments are not included in the income calculations when determining the state’s pension tax deduction.

Claiming the Pension Deduction on Your Tax Return

To claim the Michigan pension and retirement income deduction, you must complete specific forms as part of your annual state tax filing. The process begins with the Michigan Pension Schedule (Form 4884). This form is used to calculate your specific, allowable deduction based on your birth year, income type, and the current tax year’s rules.

The result from Form 4884 is then transferred to Schedule 1, the Additions and Subtractions form. That figure is then carried to the main Michigan Individual Income Tax Return, Form MI-1040, where it reduces your adjusted gross income for state tax purposes. It is important to attach both the completed Form 4884 and Schedule 1 to your MI-1040 when you file.

Filers must ensure they are using the correct forms for the specific tax year, as line numbers and instructions can change. The Michigan Department of Treasury provides the necessary forms and detailed instructions on its website.