Emergency-related state tax relief available for taxpayers located in two counties of Michigan impacted by severe weather.
Retirement and Pension Benefits
Retirement and Pension Benefits
What are Qualifying Retirement and Pension Benefits?
Retirement and pension benefits include most income that is reported on Form 1099-R for federal tax purposes. This includes defined benefit pensions, IRA distributions, and most payments from defined contribution plans.
Generally, deferred compensation income is not included in the definition of retirement and pension benefits and therefore, does not qualify for special tax treatment.
Treasury uses the terms “retirement” and “pension” interchangeably unless addressing a specific situation applicable only to one type of income.
What is and isn't Taxable?
Adjusted Gross Income (AGI) is calculated on your federal income tax return and is the starting point for your Michigan individual income tax return and may include your retirement or pension benefit distribution. AGI is the starting point for the individual income tax return. From there, taxable and nontaxable items are added and/or subtracted from AGI to determine your Michigan taxable income.
MCL 206.30(9),(10), and (11) provides guidance on the retirement benefit subtraction. To determine your allowable retirement or pension subtraction, we must consider (1) if your retirement income is considered a qualified distribution and (2) what your tax treatment options are for a given tax year.
What is a Retirement and Pension Subtraction?
It is a subtraction of all eligible retirement income from your Michigan taxable income.
The Lowering MI Costs Plan (Public Act 4 of 2023) provided taxpayers with more options to choose the best taxing situation for their retirement benefits beginning tax year 2023. Although subject to a temporary 4-year phase-in period, this law change essentially restores the pre-2012 retirement and pension subtraction while ensuring that taxpayers in unique circumstances are not harmed.
The phase-in subtraction amount is based on private pension limits, which are adjusted annually per the United States Consumer Price Index. The maximum retirement subtraction under the phase-in is the combined total of both private and public benefits eligible to be included in AGI.
| Tax Year | Taxpayer/Oldest Spouse Date of Birth | Phase-In Subtraction |
|---|---|---|
| 2023 | January 1, 1946 - | up to 25% |
| 2024 | January 1, 1946 - December 31, 1962 | up to 50% |
| 2025 | January 1, 1946 - December 31, 1966 | up to 75% |
| 2026 (and beyond) | N/A | up to 100% |
For tax year 2023 (January 1, 2023 - December 31, 2023; due April 15, 2024) and beyond, retirees can opt into any one of the following calculation methods for which they qualify for each year:
- tier structure subtraction based on year of birth,
- phase-in subtraction based on tax year,
- Michigan employment as a qualified fire, police, and corrections retiree subtraction.