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Is military pay exempt from Michigan individual income tax?

Yes. Active duty military pay is exempt from Michigan individual income tax. However most interest, dividend, capital gains, and other income received is subject to Michigan income tax. As a Michigan resident, you are required to file a Michigan individual income tax return MI-1040 regardless of where your income is earned. You should file an MI-1040, Schedule 1, and Schedule W (even if no Michigan tax was withheld) and subtract your military pay to the extent it is included in adjusted gross income.