If you are a Michigan retiree withdrawing money from your pension or 401k, the tax filing for the 2026 tax year next spring will definitely feel different. Starting from the 2026 tax year, the retirement income deduction has finally reached a full 100% phase.

At first, I thought it would just be a minor change. But when I looked up the numbers, the difference was more significant than I expected.

Let me provide some background. Michigan started taxing pension income with state income tax in 2012, creating a complex structure where benefits vary by birth year.

This was reversed by Public Act 4 of 2023, which did not eliminate the tax all at once but instead gradually increased the deduction rate over four years.

In 2023, the deduction was 25%, in 2024 it was 50%, and in 2025 it was 75%. Finally, in 2026, it will be 100%.

According to the Michigan Department of Treasury, the phased deduction limit for 2025 was $49,423 for singles and $98,846 for joint filers. This was originally 75% of the limit.

The maximum deduction for the 2026 tax year will be $67,610 for singles or individual joint filers, and $135,220 for joint filers. This limit will be adjusted each year based on the previous year's Consumer Price Index.

This means that the deduction limit for singles will increase by over $18,000 in just one year. Honestly, I was a bit surprised when I saw this number.

There is a point where many people get confused. Until 2025, the phased deduction applied only to those born between 1946 and 1966, but starting in 2026, the 100% phase will apply regardless of birth year.

The deductions include not only regular pensions but also withdrawals from workplace retirement plans like 401k and 403b. IRA withdrawals may have additional conditions based on age, so it's best to check separately.

For example, let's say a retiree filing as a single receives a total of $60,000 from their pension and 401k in a year.

In 2025, only $49,423 would be deductible, so the remaining $10,577 would be subject to a state tax of 4.25%. That comes out to just over $449.

In 2026, with the limit at $67,610, the entire $60,000 falls within the deduction range. This effectively makes the state tax on this income zero.

Of course, this is a simplified calculation without considering other income or deductions. Still, it clearly shows the direction of the changes.

There are also points to be cautious about. This limit is based on the tax return, not per person, and if you are a couple, you combine both pensions to deduct within the joint limit.

Additionally, Social Security is not subject to state tax in Michigan. So, this change pertains to pensions and retirement account withdrawals, not Social Security.

One more thing: with Public Act 24 of 2025, individuals born after 1952 who reach age 67 will be able to receive both the standard deduction and the Social Security deduction from 2026 to 2028.

The standard deduction amount is generally $20,000 for singles and $40,000 for joint filers. You can choose this instead of the retirement income deduction, so you should compare which option is more beneficial.

The Michigan state income tax rate remains at 4.25%. Remember, the tax rate has not decreased; the deduction range has simply expanded.

Practically, there is one thing to take care of right away. If state tax is being withheld from your pension or 401k, you can adjust the withholding amount using the MI W-4P form.

If the deductions have increased but the withholding remains the same as before, you will end up paying more throughout the year and receiving a refund the following year. While refunds are nice, it can be frustrating to think about cash flow each month.

So, will everyone be happy with this policy? There are opposing arguments as well.

Reducing taxes for retirees means a decrease in state revenue, leading to concerns about fairness with the working generation. The introduction of pension taxation in 2012 was also cited as a background for state financial issues.

On the other hand, supporters argue that it is unfair for those who have worked and paid taxes their whole lives to feel a double burden after retirement. They also hope to prevent retirees from leaving the state due to taxes.

Personally, I find this change quite reasonable. The previous structure, where benefits varied by birth year, was honestly too complicated, and I think simplifying the criteria is meaningful in itself.

However, taxes can vary significantly based on income composition and filing methods. Since it depends on individual circumstances, be sure to consult a tax professional before filing.

I would recommend organizing your pension and 401k withdrawal plans this year and reviewing your withholding settings. Since this is the first year with increased deductions, it's really important to get it right.

The Department of Treasury has a guide page organized by tax year, so when the 2026 information is updated, be sure to check your relevant details.