How to Complete Michigan Schedule 1 for Your MI-1040

Michigan Schedule 1 is the form that reconciles your federal adjusted gross income with the income Michigan actually taxes on your MI-1040. Part 1 lists additions — income Michigan taxes even though the IRS didn’t. Part 2 lists subtractions — income the IRS taxed that Michigan exempts. The totals from each part flow to the MI-1040, where they raise or lower your Michigan taxable income before the state’s flat rate is applied.

How Schedule 1 Feeds Into the MI-1040

Your federal AGI transfers directly to the MI-1040 as the starting point. Schedule 1 then modifies that number in two directions. The total of your required additions carries to MI-1040, line 11.¹ Your subtractions are totaled separately and carried to a later line, and the math produces your Michigan AGI. If your subtractions outweigh your additions, your Michigan taxable income falls below your federal AGI.

Anyone filing a paper MI-1040 must attach the completed Schedule 1. Electronic filers transmit the data automatically. The Department of Treasury uses the schedule to verify every adjustment you claim, so accuracy on each line affects whether your return processes cleanly.

Additions in Part 1

Additions are income items Michigan taxes even though they reduced or were excluded from your federal AGI. The Michigan Income Tax Act sets out each required addition.²

Out-of-State Municipal Bond Interest (Line 1)

Interest from bonds issued by other states or their local governments is tax-free federally but taxable in Michigan. On line 1 you report gross interest, dividends, and income from obligations of states other than Michigan and their political subdivisions.³ You can reduce this amount by related expenses your federal return disallowed under IRC Section 265(a)(1). Interest from Michigan municipal bonds and U.S. government obligations stays exempt and doesn’t get added back.

Deductions for Self-Employment and Income-Based Taxes (Line 2)

If you claimed a federal deduction for self-employment tax or for other taxes measured by income, Michigan requires you to add those amounts back. This includes your share of any income tax an electing flow-through entity paid and deducted on its federal return.³

Out-of-State Business Losses (Line 4)

Losses from a business or property located in another state that reduced your federal AGI must be added back on line 4. This applies whether you operate as a sole proprietor, a partner, or an S corporation shareholder. If the business is taxed in both Michigan and another state, the loss must be apportioned using the Michigan Schedule of Apportionment (MI-1040H).³

Business Income Recalculations Under PA 24 (Line 8)

Starting with the 2025 tax year, Michigan decoupled from several federal tax provisions enacted by the One Big Beautiful Bill Act. Public Act 24 of 2025 requires taxpayers with business income to recalculate certain deductions as if the pre-2025 federal rules still applied.⁴ The recalculations cover:

Bonus depreciation, computed using the pre-2025 phase-out schedule (40 percent for the 2025 tax year) rather than the expanded federal amount.
Section 179 expensing, capped at the pre-2025 limits of $1.25 million and a $3.13 million phase-out threshold, adjusted for inflation.
Business interest expense under IRC Section 163(j) as it existed on December 31, 2024, meaning depreciation and amortization cannot be added back to adjusted taxable income when calculating the limit.
Research and experimental expenses, which must be amortized over five years for domestic R&E costs regardless of current federal treatment.

If you have no business income, line 8 doesn’t apply. For anyone with a pass-through entity, sole proprietorship, or significant depreciation deductions, this line is where the biggest federal-to-Michigan mismatch shows up for 2025 and later years.

Subtractions in Part 2

Subtractions remove income Michigan chooses not to tax. Most of the ones that save Michigan filers real money fall into a few categories.

U.S. Government Bond Income (Line 10)

Interest and gains from U.S. government obligations are exempt from state income tax. This includes Treasury bonds, savings bonds, and obligations from entities such as Federal Home Loan Banks and the Tennessee Valley Authority.⁵ If this income was included in your federal AGI, subtract it here. The deduction must be reduced by any interest on debt you incurred to carry those obligations and by any related expenses already deducted federally.²

Military Pay and Military Retirement (Lines 11 and 14)

Michigan fully exempts both active-duty military pay and military retirement benefits. Active-duty compensation goes on line 14; military retirement and pension benefits go on line 11.¹ The exemption covers Armed Forces compensation, Michigan National Guard pay, and Railroad Retirement Act benefits.² Civilian wages a service member earns on the side don’t qualify. Base the subtraction on what appears on your W-2 or 1099-R as military compensation.

Social Security Benefits (Line 14)

Taxable Social Security benefits included in your federal AGI are subtracted on line 14.¹ Michigan law treats Social Security as deductible from adjusted gross income regardless of birth year or total income.²

Retirement and Pension Income by Birth-Year Tier

The retirement subtraction is the most complicated piece of Schedule 1 because Michigan splits taxpayers into three tiers based on birth year. The amounts below reflect the 2025 tax year and are adjusted annually for inflation where applicable. All pension subtractions require completing Form 4884, the Michigan Retirement and Pension Schedule, whose amounts flow into Schedule 1.

Tier 1 — born before 1946. All qualifying pension benefits from federal or Michigan public sources are fully deductible. Private pension and retirement income can be subtracted up to $65,897 for single filers or $131,794 for joint filers.⁶ If you also receive public pension income, the amount you claim for public benefits reduces the private pension cap. Tier 1 filers can also deduct investment income (dividends, interest, and capital gains) up to $14,688 on a single return or $29,376 on a joint return.¹

Tier 2 — born January 1, 1946 through December 31, 1952. Everyone in this group has reached age 67 and qualifies for a Michigan Standard Deduction of $20,000 for single filers or $40,000 for joint filers, claimed on Schedule 1 line 25.⁷ The deduction is flat rather than pension-specific, so it can offset wages, investment income, or any other income in your AGI. Tier 2 filers also keep their personal exemptions.

Tier 3 — born after 1952. Taxpayers in this tier cannot exempt any retirement income until reaching age 67, with one exception: Social Security is always deductible regardless of age. Once a Tier 3 filer turns 67, they choose between the $20,000/$40,000 standard deduction available to Tier 2 (reported on line 26) or continuing to exempt Social Security and claim other personal exemptions.⁷ Taxpayers who received retirement benefits for service as a public police officer, firefighter, county corrections officer, or state police trooper can claim Tier 1 treatment regardless of birth year.

Only distributions reported on Form 1099-R generally qualify as retirement income. Rental income, nonqualified annuity payments, and similar streams don’t.

Education Savings and ABLE Accounts (Lines 17 and 18)

Michigan allows a subtraction for contributions to the Michigan Education Savings Program (MESP), the MI 529 Advisor Plan, and Michigan ABLE accounts.¹ The limit is up to $5,000 per individual filer or $10,000 on a joint return. Contributions to the Michigan Education Trust, a prepaid tuition program, have their own line (line 18).

Michigan State and Local Tax Refunds (Line 16)

If your federal AGI includes a Michigan state or local income tax refund you received during the year because you itemized the prior year, Michigan subtracts that amount back out on line 16.¹ Michigan doesn’t tax its own refunds.

Income Attributable to Another State (Line 13)

Line 13 is narrower than most people assume. Michigan residents cannot subtract wages or salary earned in another state here.⁸ The subtraction applies to income such as business profits attributable to another jurisdiction. For wages taxed by another state, you claim a nonrefundable credit directly on the MI-1040, not a subtraction on Schedule 1. Confusing the two is a common error that can leave money on the table or create a mismatch the Department of Treasury will notice.

Other Subtractions

Several less common subtractions appear in Part 2:

Renaissance Zone income (line 15). Income earned while residing in a designated Renaissance Zone can be subtracted, though the exemption phases down during the last three years of a zone’s designation.
First-Time Home Buyer Savings Program (line 21). Contributions to a qualifying account are subtracted using Form 5792.
Oil, gas, and mineral extraction income (line 19). Reported using Form 5889.
Michigan net operating loss (line 30). A Michigan-specific NOL calculated on Form 5674.

Common Mistakes That Trigger Adjustments

Errors on Schedule 1 are one of the leading reasons the Department of Treasury adjusts Michigan returns. A few patterns come up repeatedly.

Claiming the wrong retirement tier is probably the most frequent. Taxpayers born after 1952 sometimes claim the full Tier 1 pension subtraction without realizing the three-tier system exists. Check your birth year, find the tier, and use the correct line (25, 26, or 27).

Forgetting to add back out-of-state municipal bond interest is another common miss. If your brokerage statement shows tax-exempt interest, you need to determine how much came from non-Michigan bonds. Many mutual funds hold a mix of bonds from multiple states, and only the Michigan portion stays exempt.

For 2025 and later, the PA 24 business income adjustments on line 8 are new enough that many filers and some tax software packages may not handle them correctly. If you have business income with significant depreciation or Section 179 deductions, double-check that your return recalculates those amounts under the pre-2025 federal rules Michigan now requires.⁴

Penalties and Interest for Errors

If Schedule 1 mistakes cause you to underpay, the Department of Treasury charges a late-payment penalty of 5 percent of the unpaid tax for the first two months. After that, an additional 5 percent accrues each month, up to a maximum penalty of 25 percent.⁹ Interest also compounds on the unpaid balance at a rate the Department sets annually. The state generally has four years from the filing date to audit a return, so an overlooked addition could surface well after you’ve forgotten about it.

Filing an amended MI-1040 with a corrected Schedule 1 before the Department contacts you won’t eliminate interest, but it can reduce or eliminate penalty exposure. If you catch an error in your favor, such as a subtraction you forgot to claim, the same four-year window typically applies to requesting a refund.

1
State of Michigan. 2025 Michigan Schedule 1 Additions and Subtractions
2
Michigan Legislature. MCL Section 206.30
3
State of Michigan. 2025 Michigan Individual Income Tax Instructions
4
Michigan Department of Treasury. Decoupling Michigan Income Taxes from Certain Internal Revenue Code Provisions
5
Legal Information Institute. Michigan Administrative Code R 206.9 – Interest Income and Gains From Sale or Disposal of United States Obligations Exempted From State Taxation
6
Michigan Department of Treasury. 2025 Tier I
7
Michigan House Fiscal Agency. Three Tiered Treatment of Retirement Income
8
Legal Information Institute. Michigan Administrative Code R 206.16 – Credit Allowed Resident for Income Tax Paid to Other States
9
Michigan Department of Treasury. Calculate Late Penalty and Interest