Michigan Pension Tax: Exemptions, 2026 Cap, and Phase-In

Michigan’s pension tax applies a flat 4.25% rate to retirement income, but the deductions available in 2026 wipe out that bill for most retirees. Starting with the 2026 tax year, the four-year phase-in under Public Act 4 of 2023 is fully in effect: every retiree born after 1945 can deduct up to $67,610 on a single return or $135,220 on a joint return in qualifying retirement and pension income. Social Security, military retirement, and railroad retirement stay fully exempt on top of that, and a separate set of rules gives even better treatment to retirees born before 1946 and to qualifying public safety retirees.

Retirement Income Michigan Never Taxes

Several categories of retirement income are exempt regardless of your age, birth year, or total income, and none of them count against your pension deduction limits:

Social Security benefits, with no income threshold or phase-out
Railroad Retirement Tier 1 benefits, treated the same as Social Security
U.S. Armed Forces retirement pay, including disability retirement
Michigan National Guard retirement pay, under the same provision as federal military pensions¹

These amounts get reported on Schedule 1 rather than on Form 4884, the pension schedule. One wrinkle for Tier 1 taxpayers (born before 1946): amounts claimed for military or railroad benefits reduce the maximum private retirement deduction available under the Tier 1 calculation, which matters if you receive both military pay and a private pension.²

Qualified Roth IRA distributions are also outside the Michigan tax base because they don’t appear in federal adjusted gross income. A Roth distribution that isn’t qualified and does land in your federal AGI is treated like any other retirement distribution.³

What Counts as Taxable Retirement Income

Michigan treats most distributions reported on federal Form 1099-R as retirement and pension benefits. That includes payments from defined benefit pensions, 401(k)s, 403(b)s, traditional IRAs, and 457 deferred compensation plans. Rollovers that aren’t in your federal AGI are excluded automatically.⁴ These are the dollars the pension deduction is designed to offset.

The 2026 Deduction Cap

Before Public Act 4 of 2023, Michigan sorted retirees into three rigid tiers by birth year and many younger retirees could deduct little or nothing. The Lowering MI Costs Plan phased that away over four years: 25% of the Tier 1 private retirement maximum in 2023, 50% in 2024, 75% in 2025, and 100% in 2026.⁵

For 2026, every retiree born after 1945 can deduct up to $67,610 (single) or $135,220 (joint) in combined public and private retirement benefits.⁶ If your retirement income falls below the cap, your Michigan income tax on that income is zero. Anything above the cap is taxed at 4.25%.

The Michigan Office of Retirement Services has said that beginning with March 2026 pension payments, most state pension recipients will have no state tax withheld automatically.⁶

If You Were Born Before 1946

Retirees born before January 1, 1946, still use the pre-2012 Tier 1 rules, which are more generous in one specific way: pension income from federal or Michigan government sources can be deducted with no dollar cap. Only private retirement income (from private employers, IRAs, and similar accounts) is subject to an inflation-adjusted maximum. The 2025 private limit was $65,897 (single) or $131,794 (joint), and the 2026 figure is adjusted annually and is expected to closely track the $67,610/$135,220 amounts that apply to everyone else.²

If you’re in this group and receive a large government pension, the Tier 1 calculation often beats the phase-in method, because the phase-in caps the combined total of public and private benefits while Tier 1 puts no cap on the public portion. Tier 1 retirees also retain a separate deduction for interest, dividends, and capital gains that other tiers don’t get.

Public Safety and SSA-Exempt Retirees

Two groups have their own rules that can produce a bigger deduction than the standard phase-in.

Public Safety Retirees

PA 4 of 2023 created a full, uncapped deduction for qualifying public safety retirees regardless of birth year or age. If you retired from one of the following positions, you can deduct all of your qualifying public retirement benefits with no dollar limit:⁷

Local police officers and firefighters, including EMS personnel and emergency telephone operators employed within the department, but not administrative or support staff
Michigan State Police troopers and sergeants
County corrections officers certified under the Local Corrections Officer Training Act and employed by a county sheriff in a jail, work camp, or similar facility housing adult prisoners

MDOC corrections officers, metropark police, and staff employed outside a qualifying department do not qualify.⁸ Private retirement income for public safety retirees remains subject to the inflation-adjusted cap.

SSA-Exempt Retirees

A separate rule applies to retirees whose government employment was not covered by Social Security, which includes some public school employees and certain municipal workers. If you retired from SSA-exempt employment before January 1, 2013, you can deduct up to $35,000 (single) or $55,000 (joint) in retirement income. If both spouses on a joint return qualify, the limit rises to $70,000. Once you reach age 67, that same dollar amount becomes an unrestricted deduction against all types of income, not just retirement income.⁹

You cannot claim the unrestricted SSA-exempt deduction and the phase-in deduction in the same year, so compare both methods before filing.

Phase-In Deduction vs. Standard Deduction at 67

Retirees who have reached age 67 make an annual choice between the phase-in deduction and the standard deduction, and you can switch methods from year to year:¹⁰

Phase-in deduction: up to $67,610 (single) or $135,220 (joint) for 2026, applied only against retirement and pension income
Standard deduction: $20,000 (single) or $40,000 (joint), applied against all types of income including wages, investment earnings, rental income, and business income

For most retirees whose primary income is pension income, the phase-in deduction wins because its dollar limit is more than triple the standard deduction. The standard deduction can be better if your retirement income is modest but you have significant income from sources the phase-in deduction doesn’t reach.

One catch for 2026 through 2028: if you choose the standard deduction, you cannot also claim Michigan’s personal exemption, which is inflation-adjusted each year. Run the numbers both ways.⁹

Stacking the Standard Deduction With Social Security

Public Act 24 of 2025 lets retirees born after 1952 who are at least 67 claim both the standard deduction and the full Social Security deduction on the same return for tax years 2026 through 2028. Before this change, any Social Security deduction reduced the standard deduction dollar-for-dollar.⁵ The stacking provision shelters $20,000 or $40,000 in non-retirement income through the standard deduction while Social Security stays fully exempt on top of that. The personal exemption trade-off still applies.

If You Moved Into or Out of Michigan

Part-year residents file Schedule NR alongside the MI-1040. The pension deduction is prorated by the ratio of Michigan-source income to total income, and only retirement income received while you were a Michigan resident counts as Michigan-source.⁹

If you’ve left Michigan entirely, federal law bars any state from taxing your retirement income once you’re a nonresident. 4 U.S.C. § 114 covers distributions from qualified plans like 401(k)s and 403(b)s, traditional and Roth IRAs, 457 deferred compensation plans, government pensions, and military retirement pay. Michigan cannot tax your pension simply because you earned it while working in the state.¹¹

Filing, Withholding, and Estimated Payments

The main tool is Form 4884, the Michigan Retirement and Pension Schedule. You enter your total qualifying benefits, pick the calculation method (Tier 1, phase-in, standard deduction, SSA-exempt, or public safety), and the form walks the math to Schedule 1, which flows into your MI-1040.¹² Social Security, military retirement, and railroad retirement go directly on Schedule 1 rather than on Form 4884. Submitting an incomplete Form 4884 can cause the entire deduction to be denied. Michigan individual income tax returns for the 2025 tax year are due April 15, 2026.¹³

You control withholding on your pension by filing Form MI W-4P (Form 4924) with your pension administrator, including electing zero withholding.¹⁴ Many retirees will want to reduce or eliminate state withholding once the full phase-in kicks in. For most state pension recipients, the Office of Retirement Services has indicated withholding will drop to zero automatically starting with March 2026 payments.⁶

If your retirement income comes from sources that don’t withhold Michigan tax, or your total income significantly exceeds the deduction cap, quarterly estimated payments may be required. Michigan requires estimated payments when your tax liability after withholding and credits will be $500 or more for the year. To avoid underpayment penalties, your total payments during the year should equal at least 90% of your current-year tax or 100% of last year’s liability (110% if your prior-year AGI exceeded $150,000).¹⁵

1
Michigan Department of Treasury. Are Military Retirement Benefits Exempt From Michigan Individual Income Tax
2
Treasury Taxes. 2025 Tier I
3
Michigan Department of Treasury. Are Distributions From a Roth IRA Subject to Michigan Individual Income Tax
4
State of Michigan: Treasury. 2021 Retirement and Pension Information
5
State of Michigan: Treasury. Retirement and Pension Benefits
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Office of Retirement Services. FAQs for Public Act 4 of 2023 – Retirement State Tax Changes
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Michigan Legislature. 2023 PA 0004
8
Treasury Taxes. Fire, Police, and County Correction Officer Retirees
9
Michigan Legislature. MCL Section 206.30
10
State of Michigan: Treasury. 2025 Tier II
11
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
12
State of Michigan. Form 4884 Instructions – Pension Schedule
13
Michigan Department of Treasury. Individual Income Tax Returns Due in a Month
14
State of Michigan. 4924 Withholding Certificate for Michigan Pension or Annuity Payments MI W-4P
15
State of Michigan Treasury. Am I Required to Make Estimated Tax Payments