Michigan’s retirement income tax rules have evolved significantly over the years, creating complexity and confusion for many retirees. The creation of retirement income deduction, based on year of birth, has created uncertainty surrounding Michigan income tax. However, beginning in the 2026 tax year, that system reaches its endpoint: full phase-in of the retirement income exemption, which makes the rules more uniform and predictable for retirees across all age groups. While Michigan still offers standard deduction options, this article will focus on the retirement income exemption, what it means, and the tax planning considerations.
As of the 2026 tax year, retirees will have full access to Michigan’s retirement income exemption per the Public Act 4 of 2023.[1] The 2026 limits that can be excluded from Michigan taxable income are:
- $67,610 for single filers
- $135,220 for married filing jointly.
While the expanded exemption may reduce Michigan income taxes for many retirees, the broader impact depends on how retirement income is sourced and timed.
What Qualifies as “Retirement income”?
According to Michigan, retirement income is generally qualified retirement distributions that are reported via 1099-R. Including:
- Public and private pensions
- IRAs
- 403(b)s
- 401(k)s
Not all distributions will automatically qualify for this exemption. Non-qualified distributions generally include (but are not limited to):
- Deferred compensation
- Early withdrawals from retirement accounts (without penalty exceptions)
- Excess deferrals and their earnings [2]
It is essential to understand how different income sources are classified before making any changes to distribution strategy.
Statutory Exemptions That Do Not Count Toward the Cap
In the context of the previously mentioned retirement income cap, some income sources are excluded from Michigan income entirely and do not count towards the deduction limit. These include:
- Social Security benefits
- Police, fire, and correction officer pensions
- Military retirement benefits [3]
Because these income sources are subtracted separately when calculating Michigan taxable income, they preserve the ability to utilize the exemption for other retirement income sources.
Next Steps: Avoiding One‑Dimensional Decisions
It is tempting to view the full phase-in as a reason for accelerating retirement income to take advantage of the Michigan tax benefit. This may be correct in some cases; however, it is still crucial to evaluate your overall tax and financial situation comprehensively. Accelerating retirement distributions to take advantage of the full retirement income exemption may have unintended consequences, especially when considering federal tax, income-based phaseouts, and available deductions.
For example, a retiree who previously limited IRA withdrawals due to tax concerns may now benefit from revisiting distribution strategies or partial Roth conversion opportunities. While the expanded exemption may reduce state tax exposure, the federal tax impact, Medicare premium thresholds, and long-term estate planning considerations could be affected, and should still be carefully evaluated before making changes.
Similarly, retirees receiving income from multiple sources — such as pensions, IRAs, and taxable investment accounts — may want to reassess how retirement cash flow is structured. Although qualifying retirement income may now receive more favorable Michigan tax treatment, investment income such as interest, dividends, and capital gains may remain taxable in Michigan, making withdrawal sequencing and asset location important considerations.
The first step for many retirees is to gain a clear understanding of how their various income sources are taxed at both the federal and state levels. That understanding can then inform distribution timing, withholding elections on pensions and IRA distributions, and other planning decisions. The Michigan Retirement Income Exemption’s phase-in brings greater uniformity to how various retirement income sources are taxed across age groups for retirees in Michigan, but it does not eliminate the need for thoughtful planning. Instead, it creates an opportunity for retirees to revisit their overall retirement income strategy and evaluate whether adjustments may better align with their broader financial goals.
Collin Hartley,
Associate Wealth Advisor &
Wealth Planner
[1]https://www.house.mi.gov/hfa/PDF/FiscalSnapshot/Tax_Three_Tiered_Treatment_of_Retirement_Income_Mar2023.pdf
[2] https://www.michigan.gov/taxes/iit/tax-guidance/tax-situations/retirement-and-pension-benefits/1099-r-distribution-codes
[3] https://legalclarity.org/michigan-retirement-income-subtraction-rules-and-recent-updates/
The information provided is for informational purposes only and does not constitute financial, investment, or legal advice. Legacy Trust and its affiliates are not responsible for any decisions made based on the information provided. Readers are encouraged to consult with a qualified financial advisor before making any financial decisions.