This year marks the beginning of a beneficial change for Michigan retirees. The state is initiating the repeal of the so-called retirement tax. This change, which effectively rolls back a decision made in 2011, will gradually take place over the next four years.
What does this mean for your retirement income? It covers various sources such as pensions, IRAs and 401(k)s. Although the process began last year, 2024 is when you may begin to see a real difference. We anticipate a substantial portion of IRA income for many of our clients will be exempt from Michigan taxes.
As a firm founded in Michigan with many Michigander clients, we at Advance Capital Management understand the importance of this tax change. We’re committed to helping you navigate both pre- and post-retirement financial waters with our personalized retirement planning services.
Taxes can often be perplexing, especially when changes occur. That’s why we're here to clarify what these developments mean for retired residents in Michigan.
What’s the Michigan retirement tax repeal?
In simple terms, Michigan is phasing out a 2011 “retirement tax” over four years. By the 2026 tax year, most retirement incomes, like your pensions and withdrawals from 401ks and IRAs, will be exempt from the state’s personal income tax. This could mean significant tax savings for you.
It’s estimated that around 500,000 Michiganders will eventually benefit from the retirement income exemption, with an average savings of about $1,000. This phase-in started with the 2023 tax year, so you might already see some savings when filing your taxes this April.
What do you need to do?
Michigan’s 2023 tax return forms already include the new retirement and pension benefit subtractions. The key point here is that your retirement distribution must come from a recognized retirement plan to qualify for these benefits. There are specific rules for employer and individual plans, so make sure your distributions meet these criteria.
Michigan retirement tax repeal phase-in schedule
The maximum retirement subtraction you may receive is shown below. It’s based on the date of birth of the taxpayer (for single/married filing separate returns) or the oldest spouse (for married filing a joint return).
Keep in mind that the maximum retirement subtraction amounts are adjusted yearly for inflation. The 2023 amount was $61,518 (per filer), and the 2024 amount has yet to be announced.
Special note for public safety retirees
If you’ve worked in public safety there’s more good news. Starting with the 2023 tax year, you can deduct your 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
This is a significant benefit for our public safety heroes!
Need more info?
Tax laws can be tricky, so it's always a good idea to chat with your tax professional and/or financial adviser. They can help you figure out your eligibility and potential savings. Also, the Michigan Treasury has prepared some helpful web pages to guide you through this change, here and here.
As a financial adviser, Sean works closely with his clients to create and implement an appropriate financial plan. He provides a wide range of services, including investment portfolio and 401(k) advice as well as retirement planning and tax planning. He is a CERTIFIED FINANCIAL PLANNER™ professional.