Retirement and Pension Benefits Treasury Tax Guidance
What are 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 for purposes of tax treatment discussion in Michigan. Treasury uses the terms “retirement” and “pension” interchangeably as Michigan statute refers to this income as "retirement or pension" unless addressing a specific situation applicable only to one type of income.
Taxable or Nontaxable?
Adjusted Gross Income (AGI) is defined as gross income in a given year minus allowable adjustments. Gross income includes (but is not limited to) your wages, dividends, capital gains, business income, and retirement distributions. AGI is calculated on your federal income tax return and is the starting point for your Michigan 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),(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) tax treatment options by tax year.
Lowering MI Costs Plan
The Lowering MI Costs Plan, signed into Michigan law on March 7, 2023, amended (in part) Section 30 of MCL 206.30 to roll back the 3-tier system of limitations and restrictions placed on the retirement subtraction in 2012. This change provides taxpayers more options to choose the best taxing situation for their retirement benefits.
NOTE: For tax year 2022 (January 1, 2022 – December 31, 2022; due April 18, 2023), retirees must calculate their allowable retirement subtraction using the Tier structure method.
Although subject to a temporary 4-year phase-in period, this new law will restore the pension subtraction for most taxpayers in Michigan beginning in 2026 - subject to some minor changes as described below. While this law will impact the 2023 tax year, it will not take effect until 90 days after the close of the current legislative session.
It is anticipated that the above changes in law will ultimately benefit most retirees in Michigan, nonetheless the Lowering MI Costs Plan ensures that taxpayers in unique circumstances are not harmed by this change in law.
Tax Treatment
Step 1: Verify Qualified Distribution Requirement
The primary requirement for a retirement distribution, in order to qualify for the Michigan subtraction, is that the taxpayer must retire under the provisions of a retirement plan. Employer plans and individual plans each have specific rules for receiving pension distributions which also must be adhered to for a retirement distribution to qualify for the Michigan subtraction.
Step 2: Choose What Works Best
Option 1: Tier Structure Subtraction
MCL 206.30(9) outlines limitations to the retirement subtraction. If the retiree receives a qualified pension distribution per step 1, the allowable pension subtraction is calculated based on date of birth of the taxpayer (for single/married filing separate returns) or the oldest spouse (for married filing a joint return). Per these requirements, retirees are divided into three tiers.
Surviving spouses should review special eligibility requirements to determine allowable subtractions.
- Retirees may subtract:
- all qualifying pension benefits received from federal or Michigan public sources. Public sources of pension income derived from other states is limited to private retirement maximums.
- qualifying private retirement and pension benefits are adjusted for inflation.
The 2022 retirement limits are: - up to $56,961 if single or married filing separate, or
- up to $113,922 if married filing a joint return.
- These maximums are subject to reduction by the amounts claimed on Schedule 1 for military pay and the following retirement or pension benefits: U.S. Armed Forces, Michigan National Guard, and Railroad Retirement Act.
- If public source pension benefits are greater than the maximum private retirement income amount, no additional retirement subtraction is allowed.
- This group of retirees must file Form 4884, Pension Schedule.
- Generally, taxpayers born between 1946 and 1952 are not eligible for a pension subtraction in 2022.
- After reaching age 67 (on or before December 31, 2022), individuals are entitled to subtract the Michigan Standard Deduction against all income.
- Generally, this group of retirees should not file Form 4884, rather, they should complete the Tier 2 Michigan Standard Deduction on Schedule 1.
- Retirees with benefits from employment with a governmental agency that was not covered by the federal Social Security Administration should review special eligibility requirements to determine allowable subtractions.
- Most taxpayers born after 1952 have no pension subtraction in 2022.
- After reaching age 67 (on or before December 31, 2022), individuals are entitled to subtract the Michigan Standard Deduction against all income. This deduction is reduced by:
- the personal exemption amount.
- taxable Social Security benefits included in AGI, claimed on the Schedule 1, and
- amounts claimed on Schedule 1 for military pay and the following retirement or pension benefits: U.S. Armed Forces, Michigan National Guard, and Railroad Retirement Act.
- To determine Tier 3 Michigan Standard Deduction on Schedule 1, complete Worksheet 2 in the MI-1040 booklet. Generally, this group of taxpayers should not file Form 4884.
- Retirees with benefits from employment with a governmental agency that was not covered by the federal Social Security Administration should review special eligibility requirements to determine allowable subtractions.
Retirees with Benefits from Employment with a Governmental Agency not Covered by the Federal Social Security Act (SSA)
- SSA exempt employment is not covered by the federal Social Security Administration. This means the worker did not pay Social Security taxes and is not eligible for Social Security benefits based on that employment.
- Almost all employment is covered by the federal SSA. The most common instances of retirement and pension benefits from employment not covered by Social Security are:
- police and firefighter retiree
- some federal retirees covered under the Civil Service Retirement System and hired prior to 1984, and
- a small number of other state and local government retirees.
- Tier 2 and Tier 3 recipients who were not covered by the federal SSA may deduct up to $15,000 per qualifying spouse and are therefore entitled to a:
- greater Michigan Standard Deduction if born between January 1, 1946 and December 31, 1952.
- greater Michigan Standard Deduction if born between January 1, 1953 and December 31, 1955 and retired as of January 1, 2013.
- greater retirement subtraction if born after January 1, 1956 and retired as of January 1, 2013.
- retirement subtraction if recipient has reached the age of 62 (born after January 1, 1956 but before January 2, 1961) but has not yet reached the age of 67
Surviving Spouse
Special rules apply for determining the tier limitation applicable to a taxpayer whose spouse has passed away. This 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.
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.
Tools You Can Use
To determine your allowable retirement benefit subtraction amount, use the 2022 Pension Deduction Estimator.
Option 2: Qualified Fire, Police, and Corrections Retiree Subtraction
A special provision was implemented for certain fire, police, and corrections retirees. Beginning tax years on or after January 1, 2023 retirees may fully deduct, to the extent a qualifying distribution is included in AGI, retirement benefits received from Michigan service as a:
- public police or fire department employee,
- state police trooper or state police sergeant, or
- corrections officer employed by a county sheriff in a county jail, work camp, or other facility maintained by a county that houses adult prisoners.
There is no limitation to the amount of a public pension deductible for these retirees, however, a surviving spouse cannot claim this retirement subtraction.
Option 3: Phase-In Subtraction
The maximum retirement subtraction described below is the private pension limit established for Tier 1 retirees. It is derived based on date of birth of the taxpayer (for single/married filing separate returns) or the oldest spouse (for married filing a joint return).
| Tax Year | Retiree Date of Birth | Phase-In Subtraction |
| 2023 | Jan 1, 1946 - Dec 31, 1958 | up to 25% |
| 2024 | Jan 1, 1946 - Dec 31, 1962 | up to 50% |
| 2025 | Jan 1, 1946 - Dec 31, 1966 | up to 75% |
| 2026 | N/A | up to 100% |
The maximum retirement subtraction amounts for single/married filing separate and married filing joint are adjusted yearly by the percentage increase in the United States Consumer Price Index. Maximums are provided prior to the start of each tax year.
If a subtraction using the Phase-In Method is claimed on a joint return in the year a spouse died and the surviving spouse has not yet remarried, the surviving spouse may use the Phase-In Method subject to the limitations applicable to a single filer return.
For tax years 2026 and after, the combined subtraction for both public and private retirement benefits is limited to the maximum retirement subtraction.
Putting it all Together
For tax year 2022 (January 1, 2022 – December 31, 2022; due April 18, 2023), retirees must calculate their allowable retirement subtraction using the Tier structure calculation method.
For tax year 2023 (January 1, 2023 – December 31, 2023; due April 2024) and beyond, retirees have the option to choose the best taxing situation for their retirement benefit by opting into any one of the following calculation methods each year:
- Tier structure subtraction.
- Phase-In subtraction.
- Michigan employment as a Qualified Fire, Police, and Corrections Retiree subtraction.
Retirees may need to consult the advice of a qualified tax preparer ensure you are able to deduct the maximum amount of retirement benefits.
Additional Resources
MI-1040, 2022 Individual Income Tax Forms and Instructions
Form 4884, 2022 Michigan Pension Schedule
Form 4884, 2022 Michigan Pension Schedule Instructions
Form 4884, 2022 Pension Schedule Worksheet
Form: 2022 Michigan Schedule 1 Additions and Subtractions
Instructions: 2022 Michigan Schedule 1 Additions and Subtractions