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 until 2026, when it is in full effect.
What does this mean for your retirement income? It covers various sources such as pensions, IRAs and 401(k)s. 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.
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 are likely already seeing some savings when filing your taxes.
Michigan’s 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.
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).
|
Birth Year |
2025 |
2026 |
|
1945 and before (no changes) |
Full amount |
Full amount |
|
1946 - 1958 |
$92,277 (joint filer); $46,138 (single filer) |
Full 2026 amount |
|
1959 - 1962 |
$92,277 (joint filer); $46,138 (single filer) |
Full 2026 amount |
|
1963 - 1966 |
$92,277 (joint filer); $46,138 (single filer) |
Full 2026 amount |
|
1967 and after |
No exemption |
Full 2026 amount |
Keep in mind that the maximum retirement subtraction amounts are adjusted yearly for inflation. For 2025, 75% of the 2025 amount is $92,277 (joint filer); $46,138 (single filer).
If you’ve worked in public safety there’s more good news: you can deduct your retirement or pension benefits without any cap. This applies to retired:
This is a significant benefit for our public safety heroes!
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.
At Advance Capital Management, we’re ready to help you plan for a comfortable retirement. If you’re a Michigan resident who needs retirement planning guidance, feel free to schedule a free consultation with one of our advisers.
Remember, staying informed and planning ahead are key to a happy, financially secure retirement. We're here to help you every step of the way!