Michigan’s Pension Tax

Lowering MI Costs Plan

The Lowering MI Costs Plan (Public Act 4 of 2023), signed into Michigan law on March 7, 2023, amended (in part) MCL 206.30 to provide taxpayers with more options to choose the best taxing situation for their retirement benefits beginning tax year 2023. Although subject to a temporary 4-year phase-in period beginning tax year 2023, this new law essentially restores the pre-2012 retirement and pension subtraction for most taxpayers in Michigan beginning in 2026. This law change will ultimately benefit most retirees in Michigan while ensuring that taxpayers in unique circumstances are not harmed. 

The law change will take effect on February 13, 2024. Treasury is committed to ensuring that all eligible retirees can take full advantage of the expanded subtraction options. Therefore, Michigan’s 2023 tax return, forms, and instructions (e-file and paper format) incorporate all retirement and pension benefit subtraction options – including those created in the new law.

Retirees can file and take advantage of the expanded retirement and pension subtraction options at the start of tax season, which saves taxpayers time and eliminates the need or expense of filing an amended return after the law takes effect. For that reason, eligible retirees should not delay in filing their tax year 2023 return and claiming the most advantageous pension and retirement benefit subtraction. Treasury will work impacted returns as they are received and prepare them for release as soon as the law takes effect.

Phasing in the Plan

Beginning in tax year 2023 (for returns filed in 2024), Michigan taxpayers will be able to choose either: 

Eligibility for income tax exemption under the Lowering MI Costs Plan during the phase-in period is determined by taxpayer age, as shown in the table below. In the case of married persons filing jointly, the age of the older taxpayer may be used to determine eligibility.

Phase in of Pension Tax Deduction

Option for Public Safety Retirees

Additionally, the law provides that, effective with the 2023 tax year, a taxpayer of any age receiving retirement or pension benefits based on public safety employment can elect to deduct those retirement or pension benefits without any cap. This applies to retired:

  • Public police or fire department employees
  • Michigan State Police troopers and sergeants
  • Corrections officers employed by a county sheriff in a county jail, work camp or other county facility that housed adult prisoners

There are special rules and exclusions, so you should review this with your tax professional to determine if you are eligible.

Michigan’s Pension Tax
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