Michigan for retirees: the year the pension subtraction comes all the way back

The 2026 return is the first since 2011 on which a Michigan retiree’s year of birth does not decide how much pension income the state taxes. Public Act 4 of 2023 phased the retirement subtraction back in over four years, 25%, 50%, 75% and now 100%, and 2026 is the 100% year. Every filer subtracts qualifying pension, IRA and employer-plan income on Form 4884 up to the indexed cap, which was $65,897 on a single return and $131,794 on a joint one for 2025; the Department of Treasury had not published the 2026 figure when this was written. Social Security comes off in full on Schedule 1, line 14, at any age and any income, as it always has. Military retired pay comes off in full. A filer who has reached 67 may instead take a Michigan Standard Deduction of $20,000 single or $40,000 joint against all income, and for 2026 through 2028 that deduction is no longer reduced by the Social Security subtraction. The result is that a retired couple with Social Security and $100,000 of pensions and IRA withdrawals owes Michigan nothing, while the same couple with $100,000 of interest, dividends and rent owes about $2,550 even after the age-67 standard deduction. What Michigan taxes in retirement is the money that did not come out of a retirement plan.

The catch is in the word “qualifying.” Michigan’s subtraction covers defined-benefit pensions, IRA distributions taken after age 59½, and 401(k) and 403(b) money attributable to employer contributions or to employee contributions the employer matched. It does not cover 457 plans, the federal Thrift Savings Plan, or 401(k) money that came only from unmatched employee deferrals. The distinction is invisible on a 1099-R and it is the most common Michigan error a generic program makes.

Social Security: subtracted in full

Whatever part of a Social Security or railroad retirement benefit is taxable federally, up to 85% under the federal formula, goes on Schedule 1, line 14 and comes off Michigan income. There is no cap, no age test and no income test. If none of the benefit is taxed federally, none of it is in AGI and there is nothing to subtract. The one place Social Security used to cost a Michigan retiree something was the standard deduction, covered below, and for 2026 through 2028 it no longer does.

The retirement subtraction, Form 4884

The 1099-R distribution code from box 7 goes on Form 4884, and the Department’s instructions key off it. A code 1 (early distribution) rarely qualifies; a code 7 (normal) from an IRA after 59½ does.

The cap. Public and private benefits together are subtracted up to the private-pension maximum, $65,897 single or married filing separately and $131,794 joint for 2025, indexed for 2026 with the figure to come. The cap is reduced by military retired pay, Michigan National Guard retirement and railroad retirement, which are subtracted in full on Schedule 1, line 11 instead. On a joint return the cap is one number for the couple, not one per spouse.

Two groups keep more. Filers born before 1946 subtract Michigan public pensions and federal civil service pensions without limit, with private benefits under the cap, and may also subtract up to $14,688 single / $29,376 joint (2025 figures) of interest, dividends and capital gains, reduced by their retirement subtraction. Retired public-safety officers, police and firefighters under Act 312, state troopers and certified county corrections officers, subtract all of their retirement benefits without limit, and their surviving spouses keep that treatment regardless of remarriage.

Military retirement from the U.S. Armed Forces or the Michigan National Guard is subtracted in full on line 11 at any age, and so is active-duty pay on line 14. A military retiree who also has a civilian pension subtracts the civilian pension on Form 4884, with the cap reduced by the military amount.

Surviving spouses may use the deceased spouse’s birth year if a joint return was filed in the year of death, a retirement or Social Security subtraction was claimed on it, and the survivor has not remarried. With birth year no longer setting the cap for 2026, this matters mainly for a survivor of someone born before 1946 who had an unlimited public pension subtraction. The cap itself does not carry over: a widow files single the year after her husband dies and the $131,794 joint cap becomes $65,897. A couple whose pensions and IRA withdrawals total $110,000 owes nothing; the survivor collecting the same $110,000 owes Michigan 4.25% of $44,103, or $1,874 (2025 cap). The joint cap also halves for a couple who file separately.

The alternative at 67: the Michigan Standard Deduction

A filer who has reached 67 by the end of the year may take a Michigan Standard Deduction of $20,000 single or $40,000 joint against all income, wages and interest included, on Schedule 1, lines 25 and 26, instead of the retirement subtraction. The deduction is reduced by the personal exemption and by any military, National Guard or railroad retirement subtracted on line 11. Until 2025 it was also reduced, dollar for dollar, by the Social Security subtraction for filers born after 1952, which made it nearly worthless to many of them. Public Act 24 of 2025 removes that offset for tax years 2026, 2027 and 2028: a filer born after 1952 who is 67 subtracts Social Security in full and takes the full $20,000 or $40,000 as well, less the exemption. This is what the “no tax on Social Security” headlines of late 2025 referred to. Social Security was already untaxed; what changed is that it stopped eating the standard deduction. The Department’s own example is a single filer born in 1953 with $23,000 of wages, $5,000 of pension and $12,000 of Social Security: taxable income $20,000 under the old rule, $8,000 under the new one, a saving of $510.

The choice is made fresh each year. The retirement subtraction wins when pension and IRA income is large; the standard deduction wins when retirement-plan income is small and other income, wages, interest, a 457 plan, unmatched 401(k) money, is large. Software compares the two; a preparer should check that it did.

Roth conversions

A Roth conversion is an IRA distribution, and an IRA distribution after 59½ is a qualifying retirement benefit. For a Michigan resident of that age the converted amount goes into AGI and comes back out on Form 4884 to the extent it fits under the cap. The Department’s bulletin on retirement income confirms that public-plan money rolled into an IRA keeps its character when later distributed, Roth or traditional, and treats private rollovers as private benefits under the cap; it does not address a conversion by name, so this is the question to put to a Michigan practitioner before converting a large amount.

The arithmetic makes the cap the planning number. A single 68-year-old with a $30,000 pension converts $100,000: qualifying benefits of $130,000 against a cap of $65,897 (2025) leaves $64,103 taxed at 4.25%, $2,724 of Michigan tax on top of the federal bill. Convert $35,897 a year instead and the Michigan tax is zero. A married couple with the same pension has $101,794 of room. Below 59½ a conversion does not qualify at all and the whole amount is taxed at 4.25%. The federal side still has teeth either way: a conversion raises AGI, which can make more Social Security taxable and raise Medicare premiums two years later through IRMAA.

The federal senior deduction, and why it does not help here

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, is taken after adjusted gross income. The MI-1040 starts from AGI, so the deduction never reaches it and no add-back is needed. The same is true of the extra federal standard deduction for age. Michigan has no age exemption of its own; its senior provisions are the age-67 standard deduction, the retirement subtraction, and the more generous homestead credit below.

What Michigan does tax in retirement

Interest, dividends and capital gains in a taxable brokerage account, at 4.25%, with no preferential rate for long-term gains. Rental profit. Part-time wages. Distributions from a 457 plan or the TSP. The taxable part of a nonqualified annuity bought outside a retirement plan. A traditional IRA withdrawal before 59½. And whatever retirement-plan income exceeds the cap. Because little of this is withheld on, a retiree with a large brokerage account or a rental should watch the $500 estimated-payment threshold; the safe harbor is 100% of last year’s tax, or 110% if last year’s AGI exceeded $150,000.

Pension payers withhold Michigan tax on Form MI W-4P. Since most pension income is subtracted, many retirees should claim enough exemptions on it to stop the withholding, or they lend the state money until the refund arrives.

Property-tax relief for seniors

Michigan has no senior freeze and no senior exemption on the property tax bill. What it has is better than many freezes: a refundable credit on the income tax return, the Homestead Property Tax Credit on form MI-1040CR, and a cap on the growth of taxable value that protects long-time owners of any age.

“Total household resources” for the homestead credit counts Social Security, pension and IRA income in full, even though the income tax subtracts them, plus nontaxable items such as the excluded gain on a home sale and an inheritance from anyone but a spouse. A couple with $34,000 of Social Security and $50,000 of pensions has $84,000 of resources and no credit (2025 limit); a widow with $26,000 of Social Security and a $5,200 tax bill gets 80% of the $4,368 excess over $832, which is well past the cap, so $1,900.

The homestead credit is where the “no senior freeze” complaint answers itself. A retired couple with $40,000 of resources and a $4,000 property tax bill gets back the excess over 3.2% of resources, $4,000 less $1,280, or $2,720, at 60% because they are above $30,000: $1,632. It is paid whether or not any income tax was owed, and a retiree who owes no tax can file the MI-1040CR by itself. The taxable value on the credit form comes from the assessment notice, not the tax bill, and a home over the $165,400 limit gets nothing however low the owner’s income.

The uncapping trap. Proposal A keeps taxable value from rising faster than inflation while the same owner holds the home, which is why a thirty-year owner pays far less than the new neighbor in an identical house. On a transfer the taxable value resets to the state equalized value, half of market value, and the new owner’s bill jumps. Transfers to a spouse, and since 2015 to children, grandchildren, parents and siblings who keep the home as a residence (verify), do not uncap. Adding a child to the deed, or moving the home into a trust whose terms are wrong, can.

No estate or inheritance tax

Michigan’s inheritance tax applies only to deaths on or before September 30, 1993, and the estate tax that replaced it collected nothing after the federal credit it was tied to ended in 2005. There is no gift tax. The only Michigan tax on a retiree’s death is the property tax uncapping above, and the Principal Residence Exemption must be rescinded by the estate on Form 2602 within ninety days.