Michigan is in the process of phasing out state income tax on much of retirees’ retirement income. The changes are being implemented gradually, with significant improvements arriving in both 2025 and 2026.
For the 2025 tax year, Michigan allows retirees to deduct 75% of qualifying retirement income from their Michigan taxable income.
This includes common retirement sources such as:
Because the deduction is partial in 2025, some portion of retirement income may still be subject to Michigan’s flat income tax rate of about 4.25%.
Beginning in 2026, Michigan will allow 100% of the retirement income deduction, significantly reducing state tax on retirement income.
For many retirees, this means withdrawals from retirement accounts may be completely exempt from Michigan state income tax up to the allowable deduction limit.
For married couples filing jointly, the retirement income subtraction is approximately $130,000 per year (indexed for inflation).
This means:
| Retirement Income | Michigan Tax Treatment |
| Up to about $130,000 | No Michigan state tax |
| Above the limit | Amount over the limit taxed at ~4.25% |
If a married couple withdraws $130,000 or less from their IRA or pension in 2026, the entire amount can typically be deducted from Michigan income, and no Michigan state income tax would apply.
If they withdraw $160,000, the first $130,000 may be deducted, leaving only $30,000 subject to Michigan’s income tax.
The 2026 change makes Michigan significantly more favorable for retirees drawing income from IRAs, 401(k)s, and pensions. With efficient planning, many couples may be able to withdraw up to about $130,000 per year in retirement income without paying Michigan state income tax.