Are Pensions Taxed in Michigan? Birth Year and 2026 Cap

Pensions are taxed in Michigan at the state’s flat 4.25% income tax rate, but most retirees will pay little or nothing on their retirement income starting in 2026. That’s when Michigan finishes phasing out the birth-year restrictions that used to lock younger retirees out of the pension subtraction. From the 2026 tax year forward, every Michigan resident can deduct retirement and pension benefits up to an inflation-adjusted cap, which was $65,897 for single filers and $131,794 for joint filers in 2025 and will be slightly higher in 2026 after a cost-of-living adjustment.¹ Social Security, military retirement, and railroad retirement benefits stay fully exempt with no dollar cap.

Retirement Income Michigan Never Taxes

Three categories of retirement income are exempt from Michigan income tax every year, at any age, with no dollar limit.

Social Security benefits. Even where a portion of your Social Security is included in your federal adjusted gross income, you subtract the full amount on your Michigan return.²

Military retirement pay. All military retirement benefits are fully exempt, including pay from the U.S. Armed Forces and the Michigan National Guard. You subtract the full amount directly on Schedule 1; you don’t need Form 4884.³ Military survivor benefits classified as military compensation or retirement pay can be deducted to the extent they’re in your federal AGI.⁴ A civilian pension earned from later civilian employment follows the normal rules described below, even if the earlier career was military.

Railroad retirement benefits. Both Tier 1 and Tier 2 benefits under the federal Railroad Retirement Act are fully exempt. Federal law bars states from taxing these benefits.⁵

The 2026 Deduction Cap for Everyone Else

Everything else, including private pensions, 401(k) distributions, traditional IRA withdrawals, annuities, and most public pensions, flows through your federal AGI onto your Michigan return as potentially taxable income. Michigan then lets you subtract that retirement income up to an annual cap.

Public Act 4 of 2023 created a four-year phase-out of the birth-year rules that used to limit who could claim this subtraction. The last step lands in 2026, when the deduction becomes available to all taxpayers regardless of when they were born.¹

The dollar cap is what matters. For 2025 it’s $65,897 on a single return and $131,794 on a joint return.⁶ The Michigan Department of Treasury will publish the 2026 figure after the Consumer Price Index adjustment is calculated, and it will be modestly higher.

Read this next part carefully, because it’s where retirees often misunderstand what the phase-out did. The 2026 change does not make retirement income tax-free. It removes the birth-year gate but keeps the dollar cap in place. A retiree with $200,000 in combined pension and IRA income will still owe Michigan tax on the amount above the cap. Because Michigan uses a single flat rate, every dollar over the cap is taxed at 4.25%.

How Birth Year Still Affects the Deduction

The three-tier structure Public Act 38 of 2011 created stays on the books alongside the phase-out, and you can elect whichever approach produces the larger deduction. On a joint return, the older spouse’s birth year controls.⁷

Born Before 1946

This group gets the most generous rules and is largely untouched by the phase-out. Federal and Michigan public pensions can be deducted in full with no dollar cap. Private pension and retirement benefits, including IRA and 401(k) distributions, are deductible up to the inflation-adjusted maximum, reduced by any public pension amount already claimed.¹

Born 1946 Through 1952

Under the old rules, this group could take only a $20,000 standard deduction against all income ($40,000 joint) starting at age 67. That option remains. It’s now usually the worse choice, because the phase-out lets these taxpayers deduct up to the full inflation-adjusted maximum on retirement income in 2026 and beyond.¹ Run both numbers.

Born After 1952

This is the group the phase-out helped the most. Before Public Act 4, most retirement income was fully taxable until age 67, when the modest $20,000/$40,000 standard deduction became available. For the 2026 tax year and after, taxpayers in this group can deduct up to the full inflation-adjusted maximum regardless of age.¹

Public Act 24 of 2025 added a related benefit for tax years 2026 through 2028. A taxpayer born after 1952 who has reached 67 and elects the $20,000/$40,000 standard deduction can also claim the Social Security subtraction without one reducing the other. The trade-off: taxpayers who take the standard deduction during that window cannot also claim their personal exemption.⁸

Public Safety Officer Pensions

Starting with the 2023 tax year, retirement benefits paid to public police and fire department employees, county corrections officers, and state police troopers and sergeants get the same treatment as pre-1946 taxpayers. These retirees can deduct their full public pension with none of the birth-year restrictions that apply to other public employees.⁵ It’s an election, so a taxpayer whose numbers work out better under the standard tier rules can choose those instead.⁹

Pensions From Another State’s Government

If you retired from another state’s government and moved to Michigan, your public pension may qualify for the same subtraction as a Michigan public pension, but only if the other state offers a comparable exemption for Michigan retirees living there. This reciprocity requirement is written into the statute, and not every state qualifies.⁵

For 2026 and after, the combined deduction across federal, Michigan, and qualifying out-of-state public pensions is capped at the same inflation-adjusted maximum that applies to private retirement income. Multiple government pensions don’t stack past the cap unless you’re a pre-1946 taxpayer electing the older rules.

Roth Conversions and Lump Sum Distributions

Converting a traditional IRA to a Roth IRA creates taxable income federally, and Michigan follows: the conversion amount is included in your Michigan taxable income. If you’re at least 59½ in the year of the conversion, the converted amount qualifies for the pension subtraction within the normal limits.¹⁰ Under 59½, the conversion is fully taxable in Michigan with no subtraction. If you’re planning a large conversion, the timing matters.

Lump sum distributions generally qualify for the pension subtraction. Michigan’s Form 4884 instructions define qualifying benefits broadly as most 1099-R payments included in AGI, covering defined benefit pensions, IRAs, and most defined contribution plans. Excluded: amounts received before you were eligible to retire under your plan, early retirement incentive payments not paid from a pension trust, and distributions from deferred compensation plans where you controlled the contribution amount.¹¹

Watch the Property Tax Credit

Michigan’s Homestead Property Tax Credit uses a broader income measure than your income tax return does. Total Household Resources includes all income, taxable and nontaxable, so pension income you successfully subtracted from your Michigan taxable income still counts toward Total Household Resources for the credit calculation.¹²

A retiree with a $60,000 pension and $25,000 in Social Security might owe zero Michigan income tax but still report $85,000 in Total Household Resources. If that number is above the program’s income limits, the property tax credit is gone even though the state income tax return shows nothing owed.

Reporting and Withholding

Retirement income moves through three forms on your Michigan return. Your federal AGI carries onto Form MI-1040. Form 4884, the Pension Schedule, calculates the subtraction based on your birth year, filing status, and income sources. The result flows to Schedule 1, which carries the total back to the MI-1040.¹³ Military retirement pay and railroad retirement benefits skip Form 4884 and go straight onto Schedule 1.³

If your pension administrator withheld Michigan tax, report it on Schedule W. You can change your withholding rate any time with Form MI W-4P. With the expanded subtractions, retirees whose income falls inside the cap may want to reduce or stop withholding rather than wait for a refund. If your remaining liability will be $500 or more for the year, though, Michigan requires estimated quarterly payments.¹⁴

1
State of Michigan: Treasury. Revenue Administrative Bulletin 2026-1
2
Department of Treasury. Pension Recipients
3
Department of Treasury. Are Military Retirement Benefits Exempt From Michigan Individual Income Tax
4
Department of Treasury. Are Military Survivor Benefits Exempt From Michigan Individual Income Tax
5
Michigan Legislature. MCL – Section 206.30
6
Department of Treasury. 2025 Tier I
7
Michigan House. Legislative Snapshot: Three Tiered Treatment of Retirement Income
8
Department of Treasury. Notice Regarding Social Security Taxation Changes in Public Act 24 of 2025
9
Michigan Legislature. House Bill 4001 as Enacted Summary
10
Department of Treasury. Is a Rollover From a Regular IRA to a Roth IRA an Allowable Subtraction
11
State of Michigan. Pension Schedule Form 4884 Instructions
12
Department of Treasury. Total Household Resources (THR)
13
State of Michigan. 2024 Michigan Individual Income Tax Return MI-1040
14
Department of Treasury. Am I Required to Make Estimated Tax Payments