Revenue Administrative Bulletin 2023-22

Individual Income Tax – Treatment of Retirement Income Under Public Act 4 of 2023

Approved: November 22, 2023

Note: A taxpayer may rely on this Revenue Administrative Bulletin (RAB) until it is revoked by Treasury or until a law on which this RAB is based is altered by legislation or by binding judicial precedent. See MCL 205.6a and RAB 2016-20.

RAB 2023-22.  This RAB discusses the tax treatment of retirement and pension income following the changes to Section 30 of the Michigan Income Tax Act (MITA) enacted by Public Act 4 of 2023 (PA 4). It updates and supplements RABs 2017-21 Individual Retirement Arrangements, 2017-25 Tax Treatment of Retirement Income from IRC 403(b) Plans, and 2018-21 Deduction of Retirement and Pension Benefits from a Public Retirement System.

Introduction

A pension is generally a series of definitely determinable payments made to an employee after retiring from employment.  Pension payments are made regularly and are based on such factors as years of service and prior compensation. Internal Revenue Service Publication 575.  An employee retirement benefit plan is any plan, fund, or program that is established or maintained by an employer or employee organization that provides retirement income to employees.  Internal Revenue Code (IRC) 403(b).  Individuals may also have retirement accounts created under various sections of the IRC that may or may not be part of an employer plan or which may be retirement plans for the self-employed.

The MITA uses the terms “retirement” or “pension benefits” to collectively refer to distributions falling into any one of three categories:

(1) pension trusts and annuity plans that qualify under section 401(a) of the IRC, including self-employment plans such as Keogh or HR 10 plans, certain individual retirement accounts where the distribution is a qualified one, 403(b) plans offered by a 501(c)(3) organization or public school system, and 401(k) plans where employee contributions are mandated by the plan or attributable to employer contributions;

(2) certain plans not qualified under the IRC, including plans created by various levels of governments such as the United States, states other than Michigan, and political subdivisions of this state, as well as church plans, and any plan where the distribution is from a pension trust and the plan prescribes the contributions and retirement eligibility; and

(3) benefits received by a surviving spouse if the benefits qualified for a deduction prior to the decedent’s death.  MCL 206.30(1)(f) and MCL 206.30(8).

When referring to retirement or pension benefits, this RAB will collectively refer to income, benefits, or distributions from either a retirement or a pension plan as retirement income, benefits, or distributions.

For tax purposes, the IRC separates retirement benefit plans into two categories: qualified and nonqualified plans. A qualified plan is one that “qualifies” for special tax treatment because it complies with certain IRC provisions.  Nonqualified plans defer compensation or otherwise provide benefits payable at retirement or termination of employment that do not qualify under the IRC and are not entitled to favorable tax treatment. To qualify for favorable tax treatment under the IRC, a retirement plan must meet certain standards such as minimum vesting requirements, minimum distribution requirements and certain nondiscrimination criteria. For Michigan purposes, qualifying retirement benefits include most payments that are reported on a Form 1099-R for federal tax purposes. This includes defined benefit pensions, Individual Retirement Arrangement (IRA) distributions, and most payments from defined contribution plans.  The distinction between qualified and nonqualified plans is important because it may allow a recipient to subtract some or all of a distribution that is included in adjusted gross income (AGI).

Pre-2012 Michigan Tax Treatment of Retirement Distributions

Before Public Act 38 of 2011 (PA 38), taxpayers could subtract most qualified retirement distributions on the Michigan return with some dollar limitations on distributions from private employers, certain public employers from other states, and on qualified distributions from individual plans such as IRAs and senior citizen annuities.  The exemption applied in full to federal and Michigan public pensions, including pensions from political subdivisions of Michigan, military retirements, and Tier 2 railroad retirements. Tier 1 railroad retirements were taxable at the federal level as Social Security and were subtracted out on the Michigan return in the same way as Social Security to the extent included in AGI.

Public pensions from other states were generally limited to the private retirement income limits or the amount allowed as a deduction or exemption by the other state to its residents on pensions received from Michigan. Fourteen states allowed a full deduction or exemption for their residents receiving Michigan public pensions, and, therefore, Michigan allowed a subtraction for the full amount of public pensions received from those states by Michigan residents.

Before PA 38, individuals with retirement income from both public and private sources were required to reduce the maximum allowable subtraction for the private plan benefits by any public pension subtracted.  The private retirement benefit maximum applied to individual IRAs, private employer retirement plans, and qualified senior citizen retirement annuities and is referred to in this RAB as the private retirement maximum under subsection 30(1)(f)(iv) of the MITA.

Post-2012 Michigan Tax Treatment of Retirement Distributions

PA 38, effective for tax years 2012 through 2022, limited the subtraction for certain recipients based on the taxpayer’s date of birth for a single or married filing separate filer or the date of birth of the older spouse for joint filers, separating taxpayers into three age-based tiers.  See section 30(9) of PA 38.  A taxpayer’s age for purposes of the retirement income deduction is determined by their age on December 31 of the applicable tax year. Taxpayers born before 1946 continued to be treated the same as under prior law.  For taxpayers born during or after 1946, new lower limits were placed on the retirement income deduction, depending on year of birth and age at the end of the tax year.

The limitations on retirement income deductions beginning in tax year 2012 separated taxpayers into three-tiers:

• Tier 1:  Taxpayers born before 1946 were not subject to any limitations on retirement income deductions other than those in place under prior law, meaning the subtraction for retirees in this tier remained unlimited for all retirement benefits received from public sources; the subtraction for retirement income earned in another state continued to be subject to the inflation-indexed private retirement maximum or the amount allowed by the other state to its residents on Michigan earned retirement income; and individuals with both public and private sourced retirement income were still required to reduce the maximum allowable subtraction for the private retirement income by any public retirement subtraction and any amounts claimed on schedule 1 for military retirement benefits due to service in the U.S. Armed Forces or Michigan National Guard or due to taxable railroad retirement benefits.
• Tier 2:  For taxpayers born in 1946 through 1952, the maximum retirement income deduction was $20,000 for a single filer or $40,000 for joint filers, reduced by any amounts claimed on schedule 1 for military retirement benefits due to service in the U.S. Armed Forces or Michigan National Guard or due to taxable railroad retirement benefits. At age 67, the $20,000/$40,000 deduction was no longer restricted to retirement income, but could be applied to all income, and was therefore referred to as the standard deduction.

For taxpayers who received retirement or pension income from a governmental agency that was not covered by the federal Social Security Act, the “uncovered” taxpayer could deduct $35,000 on a single return and $55,000 on a joint return (or $70,000 on a joint return if both spouses were “uncovered”).  After that taxpayer reached age 67, this deduction was available against all income.

• Tier 3:  For taxpayers born after 1952 there was no retirement income deduction. One narrow exception allowed a limited deduction for taxpayers aged 62 who received a retirement income from a governmental agency that was not covered by the federal Social Security Act.  Those “uncovered” taxpayers who were at least 62 years old could deduct $15,000 or, or if both spouses were “uncovered,” $30,000.

Upon reaching age 67, all taxpayers were eligible for the $20,000/$40,000 standard deduction against all income reduced by any taxable Social Security income and personal exemption and by any amounts claimed on schedule 1 for military retirement benefits due to service in the U.S. Armed Forces or Michigan National Guard or due to taxable railroad retirement benefits. Alternatively, a taxpayer could elect to forgo the standard deduction and instead deduct taxable social security benefits and the personal exemption.

Additionally, “uncovered” individuals that were retired as of January 1, 2013, could claim the $20,000/$40,000 pension/retirement subtraction plus an additional $15,000 for the “uncovered person,” and upon reaching the age of 67, could claim the $20,000/$40,000 standard deduction plus an additional $15,000 for the “uncovered person” unreduced by the personal exemption claimed or any subtraction taken for social security income.

Beginning in 2020, special rules applied for determining the tier limitation applicable to surviving spouses.  A surviving spouse could compute the subtraction based on the date of birth of an older deceased spouse as long as a retirement subtraction had been claimed on a joint return for the tax year in which the spouse died and as long as the surviving spouse had not since remarried.  A surviving spouse born after 1945 who had reached the age of 67 and had not remarried could elect to take the greater of the standard deduction against all types of income or the retirement income deduction based on the date of birth of the older deceased spouse.

Treatment of Retirement Income under PA 4

PA 4, the Lowering MI Costs Plan, signed into Michigan law on March 7, 2023, amended (in part) section 30 of the MITA, MCL 206.30, to phase out (roll back) the 3-tier system of limitations and restrictions placed on the retirement subtraction since 2012. This change provides taxpayers more options to choose the best taxing situation for their retirement benefits.  The following questions and answers provide a discussion that describes the deduction for retirement or pension benefits under PA 4.

Issue 1.  When does PA 4 take effect?

Answer.  February 13, 2024.  PA 4 was signed into law March 7, 2023, but was not given immediate effect by the Legislature.  Under Article IV § 27 of Michigan’s 1963 Constitution, an act generally takes effect 90 days after the end of the legislative session at which the act is passed, unless it is given immediate effect by a two-thirds vote of each of the legislative houses. The Michigan Constitution requires that the Legislature adjourn sine die each year at the end of a regular session.  Sine die refers to the final adjournment of the Legislature for the year because no date is set for reconvening in that year. The Legislature adjourned sine die for 2023 on November 14, 2023; therefore, the effective date of PA 4 is February 13, 2024.

However, as it relates to the retirement deduction options, once effective, PA 4 applies to tax years beginning in 2023.

Issue 2.  What changes to deduction limits on retirement benefits did PA 4 make?

Answer.  Limits on the subtraction of retirement income that are based on year of birth and age in the tax year are rolled back over a four-year period beginning in 2023 (in other words, retirement income taxation is reduced over a phase-in period) except for certain public safety officers and employees, who may fully deduct retirement income beginning in year 2023.

PA 4 enacted two new subsections within section 30 of the MITA, subsections (10) and (11).  Over a four-year period beginning in 2023, subsection (10) phases out the deduction limits previously implemented in 2012.  The new subsection (10) maximums remain subject to the limiters in subsection (1)(f)(iv) and must, therefore, be reduced by any public, military, Michigan National Guard, and railroad retirement deductions.  The impact of subsection (10) of PA 4 on the various age groups is summarized below:

• PA 4 does not impact taxpayers born before 1946 (Tier 1 taxpayers under PA 38).  The retirement subtraction for these retirees continues to be unlimited for all retirement or pension benefits received from public sources.  These retirees must still reduce the maximum allowable subtraction for any private retirement by any public retirement subtraction.  Public retirement in this context refers to federal retirement or pension or retirement or pension issued by the State of Michigan, as well as military pensions, railroad retirement pensions, and Michigan National Guard pensions.

• Tax Year 2023 – taxpayers born after 1945 and before 1959 may deduct combined public and private retirement benefits not to exceed 25% of the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA.[For 2023, this limit is $61,518 for single and married filing separate filers and $123,036 for joint filers, 25% of which are $15,380 and $30,759, respectively.]
• Tax Year 2024 – taxpayers born after 1945 and before 1963 may deduct combined public and private retirement benefits not to exceed 50% of the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA.
• Tax Year 2025 – taxpayers born after 1945 and before 1967 may deduct combined public and private retirement benefits not to exceed 75% of the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA.
• Tax year 2026 and each year thereafter – regardless of year of birth, taxpayers may deduct combined public and private retirement benefits up to the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA. The inflation-adjusted limit does not apply to taxpayers born before 1946 because subsection (10) of PA 4 is elective, and these tier 1 taxpayers may still elect to take an unlimited deduction for all retirement or pension benefits received from public sources under subsection (9)(a) of the MITA.

If a subtraction using the limitations above is claimed on a joint return for the year a spouse died and the surviving spouse has not yet remarried, the surviving spouse may use the phaseout method based on the older deceased spouse’s year of birth and subject to the limitations applicable to a single filer return.

PA 4 also added subsection (11) to section 30 of the MITA, carving out a population of taxpayers who are not subject to the four-year rollback of the deduction limits.  Instead, beginning in tax year 2023, subsection (11) restores a full deduction of any public retirement income, to the extent a qualifying distribution is included in AGI, for these retirees.  However, any public retirement deduction claimed reduces the maximum private retirement deduction.  This subsection applies to retirees receiving retirement or pension benefits from services provided as an employee of a public police or fire department, a state police trooper, a state police sergeant, or a corrections officer employed by a county sheriff in a county jail, work camp, or other facility maintained by a county that houses adult prisoners.  As a shorthand only, this RAB may refer to this class of service providers as public safety personnel or to the exemption as the public safety exemption.

The provisions of subsections (10) and (11) of Section 30 of the MITA are elective. MCL 206.30(10) and (11).  Taxpayers may choose the maximum deduction available under either provision, if applicable, or under subsection (9) of Section 30 of the MITA (the provisions that went into effect under PA 38).

Example 1:  Taxpayer Adam is the older spouse of a married couple filing jointly.  He was born in 1956 and is 67 years old in tax year 2023.  He and his spouse have retirement income of $40,000, taxable Social Security income of $12,000, and other income of $2,000 for AGI of $54,000.

Based on Adam’s age, the taxpayers fall into Tier 3.  Under subsection (9), Tier 3 taxpayers are allowed no retirement income deduction.  But because Adam, the older spouse, is 67, under subsection (9) the couple may choose to apply either the standard deduction of $40,000 against all income (in which case they cannot take a subtraction for taxable Social Security income or for personal exemptions) ($54,000 - $40,000 = $14,000) or they may forgo the standard deduction in favor of deducting taxable social security income and the personal exemption ($54,000 - $12,000 - $10,800 = $22,800).  The standard deduction results in lesser Michigan taxable income. Their Michigan taxable income would be calculated as follows:

* The Michigan returns use the shortcut method represented in this chart for automatically calculating the lowest taxable income of both subsection (9) options.

Alternatively, under subsection (10), for tax year 2023, Adam and his spouse may forgo the $40,000 standard deduction and instead deduct retirement income up to 25% of the private retirement maximum of $123,036 or $30,759 (.25 x $123,036) as well as 100% of Social Security income and the personal exemptions.  Therefore, the couple may deduct $30,759 of their $40,000 retirement income.

The couple’s deduction of $30,759 under subsection (10) is higher than their standard deduction of $17,200 under subsection (9). The retirement deduction option under subsection (10) would therefore be the more advantageous choice.   Their Michigan return would appear as follows:

Example 2:  Same facts as in Example 1 except Adam and his spouse had retirement income of $25,000, taxable Social Security income of $2,000, and other income of $15,000 for a total AGI of $42,000.  The taxpayers are still Tier 3 taxpayers and are allowed no retirement income deduction under subsection (9).  But they may take a standard deduction of $40,000 against all income (in which case they cannot take a subtraction for taxable Social Security income or for personal exemptions) ($42,000 - $40,000 = $2,000) or they may forgo the standard deduction in favor of deducting taxable social security income and the personal exemption ($42,000 - $2,000 - $10,800 = $29,200).  The standard deduction results in lesser Michigan taxable income. Their Michigan taxable income would be calculated as follows:

* The Michigan returns use the shortcut method represented in this chart for automatically calculating the lowest taxable income of both subsection (9) options.

Alternatively, under subsection (10), for tax year 2023, Adam and his spouse may forgo the standard deduction and instead deduct retirement income up to 25% of the private retirement maximum of $123,036 or $30,759 (.25 x $123,036) plus their Social Security income and the personal exemptions.

Since the couple’s retirement income, and therefore their deduction, is only $25,000, the greater deduction is the standard deduction, and the retirement deduction option under subsection (9) would therefore be the more advantageous choice.

Issue 3.  Once PA 4 is totally phased in, in tax years 2026 and later, does this result in a return to the pre-2012 treatment of retirement and pension income?

Answer.  Yes, with one exception.  Prior to PA 38 (effective 2012), retirement income from federal and Michigan sources, including political subdivisions of Michigan, were totally exempt.  Under PA 4 for the final phase-in year of 2026, and each tax year thereafter, subtractions of retirement income from these public sources are limited to the private retirement maximum under subsection 30(1)(f)(iv) of the MITA except for taxpayers born before 1946 for whom retirement subtractions are unlimited.  More specifically, in applying the private retirement maximum, a taxpayer must combine all deductible public retirement income, whether it is federal, Michigan, or retirement income from another state government with a similar or reciprocal deduction, and any private retirement income and then apply the limitation to the combined amounts.  See MCL 206.30(10)(d).

Example 3:  In tax year 2026, taxpayer Jamie, who was born after 1945, had the following income:  Michigan public pension of $45,000, federal pension of $26,000, federal taxable Social Security income of $12,000 and other income of $4,500 for AGI of $87,500.  Jamie’s combined public pensions are $71,000.  He may deduct his full retirement benefits up to the inflation-adjusted limit for private retirement benefits.  For this example, assuming no inflation adjustments were made from 2023 to 2026, the maximum deduction is $61,518.  Jamie can only deduct $61,518 of his $71,000 pension income.

Issue 4.  Are state law enforcement officers and employees retired from states other than Michigan eligible for the full deduction of public retirement income under subsection (11) of Section 30 of the MITA?

Answer:   No. In specifying the retirees that qualify for the deduction, subsection (11) limits the deduction to those retirees that are subject to Michigan laws requiring compulsory arbitration of labor disputes. Because law enforcement retirees retiring from states other than Michigan are not subject to Michigan laws requiring compulsory arbitration of labor disputes, the deduction is not available to law enforcement retirees retiring from states other than Michigan.

The statute defines 3 categories of law enforcement retirees eligible for the subsection 30(11) deduction: (1) public police or fire department employees subject to 1969 PA 312, MCL 423.231 to 423.247 (the Compulsory Arbitration of Labor Disputes in Police and Fire Departments Act), (2) state police troopers or state police sergeants subject to 1980 PA 17, MCL 423.271 to 423.287 (the Compulsory Arbitration of Labor Disputes of State Police Troopers and Sergeants Act), and (3) corrections officers employed by a county sheriff in a county jail, work camp, or other facility maintained by a county that houses adult prisoners.

The deduction for county corrections officers is limited to corrections officer retirees who were employed by a Michigan county sheriff in a county jail, work camp, or other county facility housing adult prisoners.

Issue 5.  Are retirement benefits received from the Federal Employees Retirement System (FERS) that are attributable to service as a federal law enforcement officer eligible for the subsection (11) full retirement subtraction?

Answer:  Yes, benefits received exclusively for service as a federal law enforcement officer will generally qualify for the unlimited public retirement income deduction authorized under subsection 30(11).  Before PA 4, federal retirement benefits were deductible under 30(1)(f)(i) but were subject to the limitations and restrictions in subsection 30(9).

Though the language of subsection 30(11) limits that benefit to certain retired state and local law enforcement and public safety employees, the intergovernmental tax immunity doctrine applies and allows federal law enforcement and public safety employees with retirement income to qualify for the unlimited deduction of public retirement income.

The intergovernmental tax immunity doctrine is codified in a federal statute, 4 USC §111, in which the United States Congress consented to state taxation of federal employees as long as the tax did not discriminate against federal employees on the basis of the source of the employees’ compensation.  Case law has interpreted this to bar unequal tax treatment of similarly situated federal and state employees.  See Davis v Mich Dep’t of Treasury, 489 US 803, 813 (1989) and Dawson v Steager, W Va State Tax Comm’r, 139 S Ct 698 (2019).

There are no significant differences between law enforcement retirees described in subsection (11) and those federal retirees who worked in substantially similar federal jobs.  Therefore, under the intergovernmental tax immunity doctrine, federal retirees receiving retirement income from work earned in jobs similar to state and local public police or fire department employees, state troopers or police sergeants, or corrections officers working in facilities managing adult prisoners, will qualify for the subsection (11) retirement income deduction.

Issue 6.  Do the special rules for surviving spouses apply under PA 4 as to all available deduction options?

Answer: Yes, if the surviving spouse meets the qualifying conditions.

For purposes of subsections 30(9)(f) and 30(10)(e) of the MITA, a surviving spouse may compute a retirement subtraction based on the date of birth of the older, deceased spouse if all the following are true:

• A joint return was filed for the tax year in which the spouse died.
• A retirement subtraction was claimed for the year in which the spouse died.
• The surviving spouse has not since remarried.  [See RAB 2021-24 The Retirement and Pension Benefits Deduction for a Surviving Spouse.]

A surviving spouse born after 1945 who has reached the age of 67 and has not remarried may elect to take the greater of the Michigan standard deduction or the allowable retirement subtraction based on the date of birth of the older, deceased spouse.

Subsection 30(11) of the MITA allows the surviving spouse of a subsection (11) retiree to subtract benefits earned by a deceased spouse if he or she filed a joint return for the tax year in which the retiree died and claimed a retirement subtraction for that year.  Because the subtraction is 100% of the retirement benefit, the age of the older spouse is not a factor in computing the subtraction.

Issue 7.  Under the new subsection (10) phaseout of deduction limitations of PA 4, must a taxpayer reduce the maximum retirement benefits deduction by any public, military, Michigan National Guard, and railroad retirement deductions?

Answer:  Yes.  As with private retirement or pension benefits under subsection (9), the new subsection (10) maximums are subject to the limiters in subsection (1)(f)(iv).

Before the enactment of PA 4, and regardless of which tier of subsection (9) the taxpayer fell into based on date of birth, the maximum amounts allowed for private retirement benefits had to be reduced by the sum of all deductions the taxpayer claimed for military compensation, including retirement or pension benefits, railroad retirement benefits, Michigan National Guard benefits, federal and Michigan public retirement benefits.  See MCL 206.30(1)(f)(iv).

Under the new subsection (10) rollback of the subsection (9) limitations, for each phase, the taxpayer computes a percentage of the maximum amount of retirement benefits that the taxpayer “would be allowed to deduct for the tax year under subsection 30(1)(f)(iv) if the taxpayer’s retirement or pension benefits were subject to the limitations of that subsection only.”  MCL 20630(10)(a)-(c).  In other words, regardless of the source of the taxpayer’s retirement or pension benefits, the taxpayer treats those benefits as if they were subject to the limitations applicable to private retirement or pension benefits under subsection 30(1)(f)(iv).  Thus, a taxpayer electing the subsection (10) deduction must reduce the maximum amount allowed for that deduction by the sum of all deductions taken for retirement benefits from the following sources:  taxable military compensation, including pension or retirement benefits, railroad retirement benefits, Michigan National Guard benefits, federal and Michigan public retirement benefits.  The taxpayer would then apply the applicable phaseout percentage depending on the tax year.

Example 4:  Taxpayer Eve, born in 1958, had a military pension distribution of $50,000 in 2023 and a private retirement distribution of $12,000 in the same year.  To calculate her private pension limit, she must subtract the $50,000 military pension from the maximum private maximum allowed ($61,518), leaving a private retirement maximum of $11,518.  Eve may deduct her full military pension of $50,000 under subsection 30(1)(e) of the MITA.  And under subsection 10(a), Eve may deduct 25% of $11,518 or $2,880 of her $12,000 private retirement income.

Issue 8.  Are retirement and pension administrators required to adjust the withholding of distributions based on the implementation of PA 4?

Answer:  No.  A retirement and pension administrator is generally required to withhold only on the taxable portion of any distribution after deducting any personal and dependency exemptions allowed.  MCL 206.703(1).  A pension administrator is permitted, but not required, to adjust withholding on distributions that are either not expected to be includable in a recipient’s gross income or that are deductible from AGI.  Id.

Therefore, an administrator may withhold on the taxable portion of the disbursement as currently known to the administrator until a retiree submits a revised Form MI W-4P advising the administrator of their new withholding amount.

Issue 9. If a recipient of a retirement or pension distribution eligible for subsection (11) treatment rolls that distribution into a private IRA, will subsequent distributions from the private IRA qualify for the subsection (11) deduction?

Answer:  An IRA distribution is deductible where the IRA is funded from the rollover of an otherwise exempt retirement plan.  This is true regardless of the type of IRA into which those funds were converted.  The tax-exempt character of the original retirement plan survives the rollover.  See Magen v Mich Dep’t of Treasury, 299 Mich App 566 (2013) and RAB 2017-21.  Subtractions for distributions sourced to any retirement plans not eligible under subsection (11) will not receive the subsection (11) treatment.

The underlying source of any retirement or pension benefits must be considered in determining whether those benefits are subtractable on the Michigan return.  Any subtractable retirement or pension benefit under Magen remains subject to any rules regarding a qualifying distribution and the annual deduction limits to the extent those rules and limits would be applicable to the original source funds.  Taxpayers that claim a subtraction based upon the result in Magen may be required to submit all relevant account documentation regarding the original account and subsequent rollover to substantiate the claim for subtraction.

Issue 10. Is the unlimited retirement income subtraction available under subsection (11) limited to the retirement income received for the services described under that subsection or does it apply to other retirement or pension income received by the retiree as well?

Answer: The subtraction is not limited to the retirement income received for the subsection (11) covered services.  The retirement income subtraction available under subsection (11) is available to any taxpayer with retirement or pension benefits received for services by the described public safety personnel.  And it allows those taxpayers to “elect to deduct retirement or pension benefits as provided under subsection (1)(f) without any additional limitations or restrictions . . .”  Subsection (1)(f) broadly references the types of benefits that may be deducted.  As to retirement or pension benefits, this includes 1) those received from a federal or state public retirement system or from a political subdivision of this state, 2) those received from a public retirement system of another state if that state’s income tax laws similarly treat retirement or pension benefits from Michigan or its political subdivisions, or 3) those benefits received from any other retirement or pension system or retirement annuity policy payable to a senior citizen for life, up to the private retirement or pension benefit maximum.  Therefore, if a taxpayer receives a retirement or pension benefit for services performed by subsection (11) eligible public safety personnel, that taxpayer may also deduct any of the other categories of retirement or pension benefits under subsection (1)(f) with the only limitation being the private retirement or pension maximum as determined under (1)(f)(iv).

Example 5.  In tax year 2024, taxpayer Jose, a retired state police trooper, had a Michigan public pension of $52,700.  His spouse, Chris, a senior citizen aged 65, had private retirement income of $30,400 and $43,000 in income from a retirement annuity policy.  Both Jose and Chris’ retirement income is deductible in tax year 2024 because they are taxpayers “with retirement or pension benefits received for services as a state police trooper.”  Jose will deduct all $52,700 of public benefits without limitation.  Chris’ private retirement income is limited by the private retirement maximum for a joint return as determined under subsection (1)(f)(iv).  Subsection (1)(f)(iv) requires that the private retirement maximum be reduced by the public pension benefits deducted by Jose.  Assuming no inflation in tax years 2023 through 2026, the private retirement maximum is computed as $123,036 reduced by the $52,700 of deductible public pension, or $70,336.  Chris’ total private retirement benefits of $73,400 exceed the adjusted private retirement maximum. Chris may therefore deduct up to $70,336 of private benefits, with the remaining $3,064 in excess of that amount reported as taxable on their joint return.