What Are the New Michigan Pension Tax Rules for 2023?

Michigan’s approach to taxing retirement and pension income changed for the 2023 tax year. New legislation, Public Act 4 of 2023, created different options for retirees and began a four-year phase-out of the state income tax on this income for most residents. The Michigan Department of Treasury has incorporated all new rules and subtraction options into the 2023 tax forms, making them applicable for that filing year. These updated regulations determine how retirement benefits are treated for state income tax purposes.

Determining Your Eligibility Tier

The first step in understanding your tax obligation is to determine your eligibility tier based on your date of birth. For married couples filing a joint return, eligibility is determined by the birth year of the older spouse. The state has established different rules for how retirement and pension income is handled based on which tier a taxpayer falls into. These tiers are based on birth year and dictate the available deductions detailed in the following section.

Allowable Retirement Income Deductions

The allowable deduction from your Michigan income tax depends on your eligibility tier. For those born before 1946, benefits from Social Security, military pensions, railroad retirement, and Michigan public pensions are fully deductible. For private retirement income, such as from 401(k)s, you could deduct up to $61,518 if filing single or $123,036 if filing jointly for 2023. This private deduction is reduced by any public pension benefits claimed, excluding Social Security, military, and railroad retirement.

Retirees born between 1946 and 1952 have two options for the 2023 tax year. The first option is a standard deduction of $20,000 (single) or $40,000 (joint) against all income sources. The second option is to use the new phase-in system, which allows a deduction of up to $15,380 (single) or $30,759 (joint) against retirement income.

For those born between 1953 and 1966, the rules vary. If you were born before 1959, you can choose to use the new law’s phase-in, allowing a deduction of $15,380 for single filers and $30,759 for joint filers. The other option is to use the previous law’s rules, which may allow a deduction of up to $20,000/$40,000 against all income once you reach age 67 if you do not receive Social Security.

For taxpayers born in 1967 or later, all retirement and pension benefits are fully taxable at Michigan’s 4.05% income tax rate for 2023, with no specific deduction available. However, regardless of birth year, retired public police officers, firefighters, and county corrections officers can deduct all pension benefits from their specific service.

Qualified retirement income includes distributions from 401(k), 403(b), and Section 457 plans, as well as distributions from traditional IRAs and payments from public and private pension plans. Military pensions and railroad retirement benefits are fully exempt from Michigan tax and are claimed separately from the standard pension deduction.

How to Claim the Deduction on Your Tax Return

To claim your retirement income deduction, you must complete and file specific forms with your Michigan Individual Income Tax Return (MI-1040). The primary forms are the Michigan Pension Schedule (Form 4884) and the Schedule of Additions and Subtractions (Schedule 1).

First, complete Form 4884 by reporting all retirement and pension income sources, including payer information and the total amounts received. The form will help you calculate your allowable subtraction based on your eligibility tier. If you have more than eight sources of retirement income, you must also attach the Michigan Pension Continuation Schedule (Form 4973).

After calculating your total subtraction on Form 4884, transfer this amount to line 27 of Schedule 1, titled “Retirement benefits.” Schedule 1 is used to report various adjustments to your federal adjusted gross income (AGI) to arrive at your Michigan taxable income. The total subtractions from Schedule 1 are then carried to the main MI-1040 form, reducing your income subject to Michigan tax.

You must attach both the completed Form 4884 and Schedule 1 to your MI-1040 return when you file. Failure to include these schedules will result in the denial of your pension subtraction and could delay the processing of your return.