Michigan 1040 Schedule 1: Additions and Subtractions
Accurately calculate your Michigan taxable income by learning how to properly adjust your federal AGI according to state-specific tax rules.
The Michigan Schedule 1 is a supplemental form used by taxpayers to make specific adjustments to their income for state tax purposes. Its function is to reconcile the difference between federal Adjusted Gross Income (AGI) and Michigan’s definition of taxable income. Because Michigan’s tax laws do not always align with federal regulations, certain items of income or expense must be added or subtracted from the federal AGI. This schedule ensures the final income amount reported on the main MI-1040 form accurately reflects what is taxable by the state.
Determining if You Need to File Schedule 1
A taxpayer is required to file Schedule 1 if their financial situation involves income that Michigan taxes but the federal government does not, or income the federal government taxes but Michigan exempts. This occurs if you have income from bonds or other obligations from states other than Michigan, as this interest is typically tax-exempt federally but taxable in Michigan. If your federal AGI includes income that Michigan law allows you to exclude, such as certain retirement and pension benefits, you will file Schedule 1 to claim that subtraction.
Another trigger for filing is the inclusion of a state tax refund in your federal AGI. If you itemized deductions on a prior federal return and received a state tax refund, that refund may be considered taxable income by the IRS. Michigan, however, allows you to subtract this amount. Similarly, if you have military pay or income from U.S. government obligations included in your federal AGI, Schedule 1 is used to deduct these amounts for state tax purposes.
Additions to Income
The additions section of Schedule 1 accounts for income that is not taxed at the federal level but is subject to Michigan income tax. A primary item in this category is the gross interest and dividends received from obligations of states other than Michigan. While interest from Michigan municipal bonds is exempt, interest from bonds issued by other states must be added back to your Michigan return.
Taxpayers must also add back any deduction taken for self-employment tax on their federal Form 1040. While the federal government allows this deduction to calculate AGI, Michigan does not permit it. Similarly, any losses from the sale or exchange of U.S. government obligations that were used to reduce your federal AGI must be added back.
Another addition involves losses from a business, including partnerships and S corporations, that are taxed by both Michigan and another state. A portion of that business loss may need to be added back after proper apportionment, which requires including a Michigan Schedule of Apportionment (Form MI-1040H). Additionally, gross expenses related to the production of oil and gas or the extraction of certain minerals subject to Michigan’s severance tax must be added back if they were deducted from your federal AGI.
Subtractions from Income
The subtractions section of Schedule 1 allows taxpayers to reduce their Michigan taxable income by removing items that the federal government taxes but Michigan does not. One of the most common subtractions is for income from United States government obligations. This includes interest from U.S. savings bonds, Treasury notes, and other federal bonds, which is taxable on the federal return but exempt from state income tax.
Military pay received as a member of the U.S. Armed Forces is also a significant subtraction. This includes wages for active duty, reserve, and National Guard members. If you received a state income tax refund from Michigan or any other state, and that refund was included as income on your federal Form 1040, you can subtract it on your Michigan return.
Michigan provides a deduction for retirement and pension benefits. Taxpayers must use the Michigan Pension Schedule (Form 4884) to determine their eligibility and calculate the correct deduction amount based on the current law. Social Security benefits and railroad retirement benefits remain fully exempt and should also be reported as a subtraction.
Other subtractions include income earned while living in a designated Renaissance Zone. Additionally, contributions made to the Michigan Education Savings Program (MESP) can be subtracted, up to certain annual limits per taxpayer.
Completing and Using the Schedule
To complete Schedule 1, you must first obtain the form from the Michigan Department of Treasury website. Before starting, gather all necessary federal forms and statements, such as your Form 1040 and any 1099 forms that report interest, dividends, or retirement income. These documents contain the specific figures you will need to transfer to the schedule.
You will enter your calculated addition and subtraction amounts on the designated lines. The form is divided into two main parts for additions and subtractions. After listing all applicable items in each section, you will total each column separately.
The final step is to calculate the net adjustment. You will subtract the total subtractions from the total additions. This final number, which can be positive or negative, represents the total adjustment to your income and is then transferred directly to the specified line on the main MI-1040 form.