Michigan · what’s new
What is new in Michigan for 2026: the retirement subtraction comes all the way back, and tips and overtime come off
The 2026 return is the last step of a four-year climb for retirees and the first year Michigan lets tipped and hourly workers deduct what the federal government let them deduct in 2025. The rate held at 4.25%, the exemption rose to $5,900, and Public Act 24 of 2025 did four things at once: tips, overtime, a cleaner senior deduction and a firm no to federal bonus depreciation. What to expect when the 2026 return is set beside the 2025 one.
By Charles Trautman, EA, editor
Need to Know Tax · written from Michigan Department of Treasury sources, November 3, 2026; updated November 12, 2026 after the election · not yet reviewed by a Michigan practitioner
The bottom line
- The rate is 4.25% for 2026; the Treasurer confirmed on April 15, 2026 that the conditions for a cut were not met.
- Michigan allows a subtraction equal to the federal deductions for tips and overtime, for 2026 through 2028 (Public Act 24 of 2025).
- There is no Michigan match for the federal senior or car-loan deductions.
- A filer born after 1952 who takes the Michigan standard deduction at 67 no longer has it reduced by the Social Security subtraction.
- Bonus depreciation follows the old federal phase-down, not the restored 100%.
- The MI-1040 and the Homestead Property Tax Credit claim are due Thursday, April 15, 2027.
- No tax measure was on the November 3 ballot. The 2027 rate is announced in the spring of 2027.
For the 2026 return, every Michigan filer, whatever year they were born, may subtract pension, IRA and qualifying 401(k) income on Form 4884 up to the indexed maximum, which was $65,897 single and $131,794 joint for 2025 (the 2026 figure is to come). That finishes the phase-in that began in 2023 and ends the birth-year tiers that governed Michigan retirement income since 2012. The second change is the one that surprised people: Michigan, by its own statute, matches the federal deductions for qualified tips and qualified overtime for 2026, 2027 and 2028. A nurse with $5,700 of federal overtime deduction saves another $242 in Lansing. The rate is 4.25% for 2026, confirmed by the Department of Treasury on April 15, 2026, after the revenue trigger that cut it to 4.05% for one year in 2023 did not fire. The personal exemption is $5,900, up $100.
Most of the news is in one law. House Bill 4961, signed October 7, 2025 as Public Act 24, was part of the budget and road-funding deal, and its tax provisions all take effect for 2026 returns: a Michigan subtraction equal to the federal tips and overtime deductions, the end of the Social Security offset against the age-67 standard deduction, a new conformity date of January 1, 2025 for the Internal Revenue Code, and a decoupling from the federal 100% bonus depreciation and its companions. The retirement change is older, Public Act 4 of 2023, and 2026 is simply the year its schedule reaches 100%.
The rate and the exemption
Michigan’s rate can fall automatically. Since 2023 the statute (MCL 206.51(1)(c)) requires the State Treasurer and the two fiscal agencies to compare the prior fiscal year’s general fund revenue growth with inflation each spring; when revenue outruns inflation by enough, the rate drops for that tax year. That is how 2023 came to be 4.05%. For 2026 the comparison went the other way: fiscal 2025 general fund revenue fell 1.56% while inflation rose 2.70%, so Treasury’s April 15, 2026 notice set the 2026 rate at 4.25%. The 2027 rate will be set the same way in April 2027 and is open.
The personal exemption rose from $5,800 to $5,900 for 2026, for the filer, the spouse and each dependent, and the same $5,900 applies to the stillbirth exemption. At 4.25%, each exemption is worth $251. The withholding tables for January 1, 2026 use the new figure. The special exemptions, $3,400 for a filer who is deaf, blind or disabled and $500 for a qualified disabled veteran, are the 2025 figures; Treasury had not published 2026 amounts when this was written.
Retirees: the phase-in finishes
Public Act 4 of 2023 undid the 2011 law that taxed pensions by birth year, but it did so in four steps. Filers born after 1945 could subtract 25% of the private-pension maximum in 2023, 50% in 2024, 75% in 2025, and the full maximum from 2026 on, or the old-law amount if that was larger. For 2026 there is one rule for everyone born after 1945: public and private retirement benefits, combined, come off on Form 4884 up to the indexed maximum, reduced by any military, National Guard or railroad retirement subtracted separately on Schedule 1. Filers born before 1946 keep their unlimited subtraction for Michigan public and federal civil service pensions. Treasury’s Revenue Administrative Bulletin 2026-1 replaces the 2023 bulletin and lays the rules out with examples.
Two things did not change. Social Security was never taxed in Michigan and still is not; whatever is taxable federally comes off on Schedule 1, line 14, at any age and any income. And the definition of a qualifying benefit is the same one preparers have been tripping over for years: defined-benefit pensions, IRA distributions after 59½, and 401(k) or 403(b) money that came from the employer or was matched by the employer qualify; unmatched employee-only deferrals, 457 plans and the federal Thrift Savings Plan do not. The full treatment is in Michigan for retirees.
Worked example: the same retiree, 2025 and 2026
Single, born in 1960, retired. A private pension of $48,000, IRA withdrawals of $10,000 taken after 59½, and $20,000 of Social Security that is taxable federally. No other income.
| 2025 return | 2026 return | |
|---|---|---|
| Federal AGI | $78,000 | $78,000 |
| Social Security subtraction, Schedule 1 line 14 | −$20,000 | −$20,000 |
| Retirement subtraction, Form 4884 | −$49,423 (75% of $65,897) | −$58,000 (all of it; under the cap) |
| Personal exemption | −$5,800 | −$5,900 |
| Michigan taxable income | $2,777 | $0 |
| Tax at 4.25% | $118 | $0 |
The 2026 cap will be higher than $65,897 once Treasury indexes it, but it does not matter here; $58,000 is under either figure. Had the IRA withdrawals been $20,000 instead of $10,000, the subtraction would still cover them. The pension counts only if it is a pension; a 401(k) funded solely by this retiree’s own unmatched deferrals would not.
Tips and overtime: Michigan says yes
The federal law of July 2025 created deductions for qualified tips (IRC section 224) and qualified overtime (IRC section 225) for 2025 through 2028. Both are taken after adjusted gross income on the federal return, and Michigan starts from AGI, so without a state law the income would have stayed fully taxable here. Public Act 24 adds a Michigan subtraction equal to the federal deductions claimed on the federal return for the same year, for tax years 2026, 2027 and 2028 only. There is nothing for 2025. Treasury’s January 6, 2026 notice says the Michigan amount should generally match the federal amount, which means the federal rules travel with it: the $25,000 cap on tips, the $12,500 single and $25,000 joint caps on overtime, the phase-outs above $150,000 and $300,000 of modified AGI, and the requirement that the occupation be one the IRS lists as customarily tipped (verify federal figures). A resident deducts the whole federal amount. A nonresident deducts only tips and overtime for services performed in Michigan.
The 2026 Schedule 1 had not been released when this was written, so the line number is to come. Expect a subtraction line that asks for the amounts from the federal Schedule 1-A, and expect Treasury to want the federal figure, not the gross tips from the W-2.
Worked example: a two-earner family with overtime and tips
Married, two children. He is an electrician with $62,000 of wages, of which $6,000 is the premium half of his overtime and qualifies for the federal overtime deduction. She serves in a restaurant: $27,000 of wages including $3,000 of reported tips, all of which qualifies. Federal AGI $89,000. Michigan withholding of $2,800.
| If Michigan had not acted | 2026 return under PA 24 | |
|---|---|---|
| Federal AGI | $89,000 | $89,000 |
| Tips and overtime subtraction | $0 | −$9,000 |
| Exemptions, 4 × $5,900 | −$23,600 | −$23,600 |
| Michigan taxable income | $65,400 | $56,400 |
| Tax at 4.25% | $2,780 | $2,397 |
| Withholding | −$2,800 | −$2,800 |
| Refund | $20 | $403 |
The $383 difference is 4.25% of $9,000. Michigan withholding does not know about the deduction, so the saving arrives as a larger refund rather than a larger paycheck. Both deductions end after 2028 unless the legislature extends them.
The senior standard deduction loses its Social Security offset
This is the change that was reported as “Michigan stops taxing Social Security.” Michigan never taxed it. What Public Act 24 changed is narrower. A filer born after 1952 who has reached 67 may choose, instead of the retirement subtraction, a Michigan Standard Deduction of $20,000 single or $40,000 joint against all income. Through 2025 that deduction was reduced by the personal exemption and by the taxable Social Security the filer was already subtracting, so a $20,000 deduction could shrink to a few thousand dollars. For 2026, 2027 and 2028 the Social Security offset is gone. The exemption offset stays, as do the offsets for military, National Guard and railroad retirement. Treasury’s November 17, 2025 notice puts the cost at $20 to $30 million a year statewide, which tells you it is a modest change for most households and a large one for a few.
Worked example: Treasury’s own case, with the exemption added
Single, born in 1953, age 73 in 2026, still working part time. Wages $23,000, a small pension of $5,000, and $12,000 of Social Security taxable federally. AGI $40,000. She takes the Michigan Standard Deduction rather than the retirement subtraction.
| Old rule (2025) | 2026 under PA 24 | |
|---|---|---|
| Federal AGI | $40,000 | $40,000 |
| Social Security subtraction | −$12,000 | −$12,000 |
| Standard deduction: $20,000 less exemption, less Social Security (old rule) | −$2,100 | −$14,100 |
| Personal exemption | −$5,900 | −$5,900 |
| Michigan taxable income | $20,000 | $8,000 |
| Tax at 4.25% | $850 | $340 |
The saving is 4.25% of the $12,000 of Social Security that used to eat the deduction. Treasury’s notice uses the same income figures and reaches the same $20,000 and $8,000; this version shows the exemption offset, which the notice leaves out and which still applies. The 2025 column uses the 2026 exemption for a like-for-like comparison.
Bonus depreciation: Michigan says no
The same act that said yes to tips said no to the business side of the 2025 federal law. Public Act 24 moved Michigan’s reference to the Internal Revenue Code from January 1, 2018 to January 1, 2025, and then carved out the expensive parts. For tax years beginning after December 31, 2024, Michigan AGI is computed as if sections 168(k) (bonus depreciation), 163(j) (the interest limit), 174 (research costs) and 179 (expensing) stood as they did on December 31, 2024, and as if the new sections 168(n) (factory expensing) and 174A (research expensing) did not exist. The House Fiscal Agency put the federal law’s cost to Michigan, without the decoupling, at $540 million in the first fiscal year.
For a household this reaches anyone with a Schedule C, E or F or a K-1 that claimed bonus depreciation federally. The federal 100% write-off is added back on Schedule 1, line 8, as a “P.A. 24 adjustment,” and the depreciation Michigan would have allowed under the old phase-down is subtracted on line 23, year by year, until the asset is written off or sold. Under the 2024 schedule the bonus percentage for property placed in service in 2026 would be 20%, and none from 2027; the section 179 limit is frozen at its 2024 level (verify the figure). Over the asset’s life the Michigan deduction equals the federal one. The timing does not, and the add-back is larger than it has been in years because the federal percentage is back at 100%. The lines are already on the 2025 Schedule 1; 2026 is the first full year most filers will meet them.
What the federal law did that Michigan ignores
The $6,000 federal senior deduction, the car-loan interest deduction and the higher SALT cap are all taken after AGI on the federal return. Michigan starts from AGI and has no itemized deductions, so none of them reach the MI-1040 and none need an add-back. A 68-year-old who owes no federal tax because of the senior deduction still owes Michigan on the same income, unless the Michigan Standard Deduction or the retirement subtraction covers it. Car-loan interest is taxed at 4.25%. The SALT cap is irrelevant on a return with nothing to itemize; the state’s flow-through entity tax, a 4.25% tax the business elects to pay with a refundable credit to the owner, remains the workaround for pass-through owners who itemize federally.
Beyond the income tax
On January 1, 2026, motor fuel came out of the 6% sales tax and the per-gallon excise rose from 31 to 51 cents, as part of the same budget deal that produced Public Act 24 (verify). Nothing about it touches the income tax return. The Homestead Property Tax Credit limits for 2025, $71,500 of household resources, $165,400 of taxable value, and a $1,900 maximum, are indexed and the 2026 figures are to come. There was no income tax question on the November 3, 2026 ballot: the Invest in MI Kids initiative, a 5% surtax on income above $500,000 single and $1 million joint for schools, fell short of the 446,198 signatures it needed and suspended its drive. Its backers have said they may try again for 2028.
The 2026 return against the 2025 return
- Wage earners: $100 more exemption per person. Tips and overtime that qualified federally come off the Michigan return for the first time.
- Retirees born 1946 through 1959: the full retirement subtraction instead of 75%, or the standard deduction at 67; those born after 1952 who take the standard deduction keep all of their Social Security subtraction too.
- Retirees born 1960 or later: the full retirement subtraction, which most of them could not reach at 75%.
- Families: no new credit. The Michigan EITC is still 30% of the federal credit, and each child is still one $5,900 exemption. See Credits and breaks for Michigan families.
- Business owners, landlords and farmers: the P.A. 24 adjustments on Schedule 1 lines 8 and 23, with the federal depreciation schedule in hand.
- Nonresidents with Michigan tips or overtime: the subtraction, limited to Michigan work.
- Everyone: the rate is 4.25%. The 2027 rate is decided in April 2027.
Behind the scenes: why a budget bill carried the tax changes
Public Act 24 was one of several bills tied together in the October 2025 budget and road-funding agreement; the House Fiscal Agency analysis notes it could take effect only if three companion bills were also enacted. The decoupling from bonus depreciation was the revenue piece: the federal law would otherwise have cost the general fund roughly half a billion dollars in its first year, and the state used the recovered money to cover the tips and overtime subtractions ($158 million a year combined) and the Social Security fix ($20 to $30 million). Michigan uses a fixed conformity date, so every federal change has to be adopted by moving the date; the legislature moved it seven years forward to January 1, 2025 and then listed what it would not follow. Note what is not on the list: the federal senior deduction, which costs Michigan nothing because it never reached the return.
What to bring
- Last year’s MI-1040, Schedule 1 and Form 4884, to compare line by line
- The federal Schedule 1-A, or whatever the 2026 Form 1040 uses for the tips and overtime deductions, since Michigan copies the federal amount
- W-2s showing reported tips (box 7) and the employer’s overtime statement
- Every 1099-R, with the plan type: pension, IRA, 401(k) with employer money, or employee-only deferrals
- SSA-1099, so the Social Security subtraction and the standard deduction can be figured both ways
- Dates of birth; age 67 and the 1952 birth-year line both matter in 2026
- For a business, farm or rental: the federal Form 4562 and depreciation schedule for the P.A. 24 adjustments
Questions people ask
Did Michigan pass “no tax on tips” and “no tax on overtime”?
Yes, for 2026 through 2028. Public Act 24 of 2025 gives a Michigan subtraction equal to the federal deductions for qualified tips and qualified overtime claimed on the federal return. It does not apply to 2025. A nonresident gets it only for work performed in Michigan.
Did the Michigan income tax rate change for 2026?
No. It is 4.25%. Treasury checks each April whether general fund revenue grew faster than inflation; for fiscal 2025 revenue fell 1.56% and inflation rose 2.70%, so the automatic cut did not apply. The 2027 rate will be set in April 2027.
Is my pension fully exempt now?
Up to the cap. For 2026 anyone born after 1945 may subtract qualifying public and private retirement benefits up to the indexed maximum, $65,897 single and $131,794 joint for 2025 with the 2026 figure to come. Whether a 401(k) distribution qualifies depends on whose money funded it. Filers born before 1946 still have no cap on public pensions.
Does Michigan tax Social Security now, or did it stop?
Neither. Social Security has always come off the Michigan return in full. What changed for 2026 through 2028 is that a filer born after 1952 who takes the $20,000 or $40,000 Michigan Standard Deduction at 67 no longer has it reduced by the Social Security subtraction.
I bought equipment for my business in 2026 and wrote it all off federally. Why is my Michigan income higher?
Because Michigan did not adopt the federal 100% bonus depreciation. The federal write-off is added back on Schedule 1, line 8, and the slower depreciation Michigan allows is subtracted on line 23 each year. You get the same total deduction over time.
Does the federal $6,000 senior deduction reduce my Michigan tax?
No. It is taken after adjusted gross income on the federal return, and Michigan starts from AGI. Michigan’s own senior relief is the retirement subtraction, the Social Security subtraction and the age-67 standard deduction.
Was there a tax question on the November 2026 ballot?
No. The graduated-tax initiative did not gather enough signatures. The flat rate stays, and the constitution still requires it.
Pensions all the way off, tips and overtime off for three years, rate unchanged
Check the plan type on every 1099-R, carry the federal tips and overtime figure to the Michigan return, and let the 2027 rate wait for April.
Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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Forms and official pages named in this article
Sources and where to check
- Treasury notice, April 15, 2026: 4.25% income tax rate for the 2026 tax year
- Treasury notice, January 6, 2026: new deductions for qualified overtime compensation and qualified tips
- Treasury notice, November 17, 2025: Social Security taxation changes in Public Act 24 of 2025
- Revenue Administrative Bulletin 2026-1: retirement and pension benefits
- Treasury: withholding rate and personal exemption by year ($5,900 for 2026)
- House Fiscal Agency, legislative analysis of HB 4961 (Public Act 24 of 2025)
- Treasury: Homestead Property Tax Credit, 2025 limits