For the 2026 tax year, the Michigan retirement subtraction lets any retiree deduct up to $67,610 on a single return or $135,220 on a joint return of qualified retirement income, regardless of birth year. At Michigan’s flat 4.25% income tax rate, a maxed-out subtraction saves a single filer about $2,873 and a joint filer about $5,747. This is the final step of a four-year phase-out of the old birth-year tier system enacted by Public Act 4 of 2023.1Michigan Department of Treasury. 2026 Michigan Income Tax Withholding Guide
2026 Deduction Limits
Every Michigan taxpayer can now elect to subtract qualified retirement income up to the inflation-adjusted cap of $67,610 (single) or $135,220 (joint) for 2026. The cap adjusts upward each year for inflation, so 2027 figures will be higher.2Michigan Office of Retirement Services. FAQs for Public Act 4 of 2023 – Retirement State Tax Changes
One change catches long-time retirees off guard. Public pension income is now subject to the same combined cap as private retirement income for anyone born in 1946 or later. Under the prior rules, taxpayers born before 1946 got an unlimited subtraction for federal, state, and local government pensions. Starting in 2026, only that pre-1946 group keeps the unlimited public pension treatment. Everyone else combines all retirement income, public and private, and applies the single cap to the total.3State of Michigan. Revenue Administrative Bulletin 2026-1
Here is what that looks like in practice. A married couple filing jointly with $90,000 from a state pension and $60,000 from a 401(k) has $150,000 in total retirement income. They can subtract $135,220 and pay Michigan tax on the remaining $14,780. Before this change, the state pension portion alone would have been fully exempt for a Tier 1 taxpayer.
Retirement Income That Qualifies
The subtraction covers a wide range of retirement sources. The reporting lines on the Michigan return still separate public from private, even though the combined cap treats them the same for most filers.4Michigan Legislature. MCL Section 206.30
- Public pensions from federal, state, and local government employment, including systems like the Michigan Public School Employees’ Retirement System. Pensions from other states’ public retirement systems qualify if that state offers a similar deduction to Michigan retirees.
- Private employer pensions and defined benefit plans that pay a set monthly benefit.
- Distributions from 401(k) accounts, 403(b) plans, and similar defined contribution plans.
- Distributions from traditional IRAs. Qualified Roth IRA distributions generally aren’t in adjusted gross income to begin with, so the subtraction doesn’t apply to them.
- Payments from qualifying annuity contracts under qualified plans.
- Railroad retirement benefits, which are treated as retirement income.
Social Security and Military Retirement
Social Security benefits are exempt from Michigan income tax for every taxpayer and do not count against the retirement subtraction cap. That has not changed.5Michigan House of Representatives. Legislative Snapshot – Three Tiered Treatment of Retirement Income
Military retirement pay for service in the U.S. armed forces is also fully exempt, with no dollar limit and no interaction with the retirement subtraction cap. Report it on Schedule 1 of your Michigan return, and include it on Schedule W even if no Michigan tax was withheld. A civilian pension from military employment is treated like any other public pension and falls under the standard subtraction rules.6Michigan Department of Treasury. Are Military Retirement Benefits Exempt From Michigan Individual Income Tax
A separate rule affects taxpayers born after 1952 who choose the older $20,000/$40,000 standard deduction against all income types rather than the retirement subtraction. Under prior law, that standard deduction was reduced by the taxable portion of Social Security in federal AGI. Public Act 24 of 2025 removed that offset for tax years 2026 through 2028, so those taxpayers can now claim the $20,000/$40,000 deduction and exempt Social Security without one reducing the other.7Michigan Legislature. House Bill 4961 (H-1) as Passed by the House Most taxpayers born after 1952 will do better with the full $67,610/$135,220 subtraction, but retirees with modest pension income and substantial Social Security should run both calculations before filing.
Police, Fire, and Corrections Pensions
Public Act 4 of 2023 created a permanent carve-out for certain public safety retirees. If your pension comes from service as a police officer, firefighter, state police trooper or sergeant, or county corrections officer, you can elect to deduct the full amount of those retirement benefits with no cap. That mirrors the unlimited treatment given to taxpayers born before 1946.8Michigan Legislature. Enrolled House Bill No. 4001 – Public Act 4 of 2023
The election has been available since the 2023 tax year. Public safety retirees with other retirement income alongside the qualifying pension should compare the unlimited election against the standard subtraction to see which delivers the larger deduction overall.
How the Phase-In Got Here
Michigan’s current rules are the endpoint of a system that ran from 2012 through 2025 and still shows up on older forms and guidance. Public Act 38 of 2011 sorted retirees into three tiers by birth year:9Michigan Legislature. 2011 Public Act 38
- Tier 1, born before 1946: unlimited exemption for government pensions and a large inflation-adjusted cap for private retirement income.
- Tier 2, born 1946 through 1952: a $20,000 (single) or $40,000 (joint) deduction against all income types.
- Tier 3, born after 1952: no retirement subtraction until age 67, other than Social Security.
Public Act 4 of 2023 phased the tiers out over four years by letting eligible taxpayers elect a growing percentage (25%, 50%, 75%, 100%) of the Tier 1 private retirement cap. The 2026 tax year is the 100% year. For nearly everyone, the tier labels no longer control the size of the subtraction. The one place they still matter is the unlimited public pension treatment reserved for taxpayers born before 1946.10Michigan Legislature. House Bill 4001 as Enacted – Public Act 4 of 2023
Surviving Spouse
A surviving spouse who was on a joint return claiming the retirement subtraction can keep filing under the same limitations that applied based on the older spouse’s birth year. If the deceased spouse was born in 1944 and the surviving spouse in 1955, the surviving spouse continues to use Tier 1 rules on a single return. The protection ends if the surviving spouse remarries.4Michigan Legislature. MCL Section 206.30
What to Do Now
If you have not updated your Michigan withholding since before 2023, the expanded subtraction may mean too much state tax is coming out of your pension or distributions. File a new MI W-4P with your plan administrator, or contact the Michigan Office of Retirement Services if your pension is paid through a state system. Two other dates worth keeping in mind: the Social Security fix for post-1952 taxpayers under Public Act 24 of 2025 expires after the 2028 tax year unless the legislature extends it, and the $67,610/$135,220 caps will adjust upward for inflation each year going forward.