How Does Michigan Tax Retirement Income?

Michigan’s approach to taxing retirement income is multifaceted, with rules that differ based on the retiree’s age and the specific source of the income. The state has established a framework that provides various levels of tax relief, creating a distinct landscape for those planning their financial future in retirement. This landscape is shaped by ongoing legislative changes aimed at adjusting the tax burden for retirees across the state.

Taxation of Social Security Benefits

Michigan provides a tax advantage by fully exempting Social Security benefits from state income tax. This exemption applies universally, regardless of a taxpayer’s total income or year of birth, so this income is not included on the Michigan tax return. This treatment contrasts with federal rules, where up to 85% of Social Security benefits can be taxed depending on an individual’s combined income. In Michigan, the entire amount is deductible.

The Three-Tier System for Pension and Retirement Benefits

Michigan determines the taxability of most pension and retirement income, including distributions from 401(k)s, IRAs, and pensions, through a system based on the recipient’s birth year. For joint filers, the older spouse’s birth year is used. Public Act 4 of 2023 initiated a phase-out of this system, aiming to make most retirement income fully exempt by 2026. During this transition, taxpayers can choose between the new phase-in rules or the previous system, selecting whichever is more favorable.

Tier 1: Born Before 1946

Retirees born before 1946 can subtract all qualifying pension benefits from public sources. For income from private pensions and retirement accounts like 401(k)s and IRAs, a large deduction is available, subject to inflation-adjusted limits. Additionally, these taxpayers may be eligible for a separate deduction for interest and dividend income.

Tier 2: Born Between 1946 and 1952

Under previous rules, this group was eligible for a deduction capped at $20,000 for single filers and $40,000 for joint filers. With Public Act 4, these retirees are part of a gradual phase-in of expanded deductions. For the 2024 tax year, they can deduct 50% of the maximum pension deduction, which increases to 75% for the 2025 tax year.

Tier 3: Born After 1952

Retirees born after 1952, who previously had most of their private retirement income fully taxed, are now part of a multi-year phase-in to restore a full deduction. For the 2024 tax year, those born before 1963 can deduct 50% of the maximum. The phase-in continues for the 2025 tax year, allowing taxpayers born before 1967 to deduct 75% of the maximum amount. By the 2026 tax year, all retirees in this tier will be able to claim the full deduction.

Special Provisions for Specific Income Types

Beyond the three-tier system, Michigan law provides distinct tax treatment for certain types of retirement income. These rules apply irrespective of the retiree’s birth year and override the general tier structure.

Military Retirement Benefits

Retirement benefits received for service in the U.S. Armed Forces and the Michigan National Guard are completely exempt from Michigan income tax. This full deduction applies to all military pensions and retirement pay, offering a financial benefit to veterans residing in the state.

Railroad Retirement Benefits

Benefits received under the federal Railroad Retirement Act of 1974 are also fully exempt from Michigan income tax. Similar to Social Security, these benefits are not subject to the state’s flat income tax.

Michigan Public Pensions

While most public pensions are subject to the three-tier system, some receive special consideration. Retirement benefits for certain public safety officers, including police, firefighters, and corrections officers, can be fully deducted regardless of age.

Other Key Michigan Tax Considerations for Retirees

Retirees in Michigan should be aware of several other tax provisions that can impact their overall financial situation. These extend beyond income taxes and include valuable credits and the state’s stance on estate taxes.

Homestead Property Tax Credit

The Homestead Property Tax Credit helps offset the cost of property taxes for eligible homeowners and renters. To qualify, a resident must meet criteria related to their “total household resources,” a broad measure of income, and the taxable value of their home. For the 2024 tax season, the credit is worth up to $1,800, and eligibility is limited to those with household resources of $69,700 or less and a property with a taxable value of $160,700 or less.

Taxation of Other Income

Income from sources other than pensions and Social Security, such as interest, dividends, and capital gains, is subject to Michigan’s 4.25% flat income tax rate as of 2025. However, taxpayers born before 1946 may be eligible for a specific deduction against this type of income, separate from their pension subtractions.

Estate and Inheritance Tax

For long-term financial planning, Michigan does not impose an estate or an inheritance tax. This means that upon a resident’s death, the state does not tax the transfer of property to beneficiaries. This simplifies the estate planning process and can be a financial advantage compared to states that levy such taxes.

Reporting Retirement Income on Your Michigan Tax Return

To report retirement income, you will need federal Form 1099-R for distributions from pensions and IRAs, and Form SSA-1099 for Social Security benefits. The reporting process occurs on the Michigan Individual Income Tax Return (Form MI-1040) and its schedules. You will use Schedule 1 (Additions and Subtractions) to adjust your federal Adjusted Gross Income (AGI). On this schedule, you subtract non-taxable Social Security, military, and railroad retirement benefits.

For benefits subject to the three-tier system, you must complete the Michigan Pension Schedule (Form 4884). This form calculates your deduction based on your birth year, and the final amount is entered on Schedule 1 to reduce your taxable income. The Homestead Property Tax Credit is claimed using Form MI-1040CR.