Michigan taxes some pensions and not others, depending on the source and your age

Michigan does not tax retirement income — which includes pensions, 401(k) withdrawals, and IRA distributions — if you are 67 or older. If you are younger than 67, Michigan taxes pension income the same way it taxes wages: at a flat rate of 4.25 percent. The key exception is military pensions and certain federal employee pensions, which Michigan exempts regardless of your age.

The rule is straightforward but the details matter, because what counts as "retirement income" under Michigan law is narrower than you might think. A pension from a private employer, a public employee pension (like a teacher or police officer pension), or a distribution from a 401(k) or IRA all count. But if you are under 67 and receiving a pension, Michigan will withhold tax unless you meet one of the exemptions.

Key Takeaways

  • Michigan does not tax any retirement income — including pensions — if you are 67 or older, regardless of the source.
  • If you are under 67, Michigan taxes pension income at 4.25 percent, the same rate it applies to wages.
  • Military pensions and certain federal employee pensions are exempt from Michigan tax at any age.
  • Your pension payer should withhold Michigan tax automatically; if they do not, you will owe it when you file your state return.

Who qualifies for the age 67 exemption

The exemption applies to anyone who is 67 or older on December 31 of the tax year. You do not have to be retired — you could still be working — but you must have reached that age by year-end. If you turn 67 on December 31, you may have access to for that tax year. If you turn 67 on January 1, you may have access to starting the following year.

The exemption covers all retirement income: pensions from employers, IRAs, 401(k)s, 403(b)s, and Roth conversions. It does not matter whether the money came from your contributions or your employer's. Once you are 67, Michigan does not tax it.

This exemption is separate from the federal standard deduction and from any federal tax credits you might receive. Even if you have little federal tax liability, Michigan still exempts your retirement income at 67.

What happens if you are under 67

If you receive a pension before age 67, Michigan taxes it as income. The state tax rate is 4.25 percent, applied to the gross pension amount. Your pension payer — the employer, union fund, or insurance company sending you the check — should withhold this tax automatically and send it to Michigan on your behalf.

If your pension payer does not withhold, you are responsible for paying the tax when you file your Michigan return. You can also request additional withholding if you want to cover other income or avoid a tax bill at filing time. Contact your pension administrator to adjust your withholding.

Early retirement does not change the rule. A teacher who retires at 55, a police officer at 50, or a private employee at 60 all owe Michigan tax on their pension until they turn 67.

Military and federal employee pensions

Michigan exempts military pensions entirely, regardless of age. This includes pensions from the U.S. Army, Navy, Air Force, Marines, Coast Guard, and Space Force. The exemption applies whether you are 30 or 80.

Certain federal employee pensions also receive an exemption, but not all. Federal employees covered by the Civil Service Retirement System (CSRS) are exempt. Federal employees covered by the Federal Employees Retirement System (FERS) are not exempt under Michigan law, though they may be exempt under federal law depending on when they retired.

If you receive a federal employee pension, check your pension statement or contact your pension administrator to confirm which system you are under. Your pension payer should know whether Michigan tax applies to your specific pension.

How to report pension income on your Michigan return

Michigan uses Form MI-1040, the state income tax return. Pension income goes on line 1 along with wages and other income. If your pension payer withheld Michigan tax, that amount appears on a Form MI-W2P or similar state withholding statement, which you will receive by January 31.

If you are 67 or older, you can claim the retirement income exemption on your return. Michigan Form MI-1040 has a line for this deduction. You subtract your retirement income from your total income, which reduces your taxable amount to zero (assuming retirement income is your only income).

If you are under 67 and your pension payer did not withhold tax, you will owe the 4.25 percent when you file. If too much was withheld, you will receive a refund. The calculation is straightforward: your pension amount times 4.25 percent equals your Michigan tax.

What to do if your pension payer is not withholding

Contact your pension administrator or the human resources department of the organization paying your pension. Ask whether they are withholding Michigan state tax. If they say no, ask why — it may be because they believe you are exempt (for example, if you told them you are 67 or older), or it may be an oversight.

If you are under 67 and they are not withholding, you have two options. You can request that they start withholding going forward, or you can pay the tax yourself when you file your return. If you choose to pay at filing time, set aside 4.25 percent of each pension payment so you are not caught short.

Some pension payers, particularly smaller employers or out-of-state funds, may not be set up to withhold Michigan tax. In that case, you will need to pay the tax on your return or request estimated tax payments to Michigan if you expect to owe more than a small amount.

Frequently Asked Questions

Do I have to pay federal tax on my Michigan pension?

Federal tax on pensions is a separate question from Michigan state tax. Most pensions are taxable at the federal level regardless of age, though some military pensions receive federal exclusions. Consult a tax professional or the IRS website for federal rules; this guide covers Michigan state tax only.

If I move out of Michigan, do I still owe Michigan tax on my pension?

No. Once you establish residency in another state, Michigan does not tax your pension income. However, your new state may tax it. You should file a final Michigan return for the year you move and update your pension payer's withholding information with your new state of residence.

What if I receive a lump-sum pension payout instead of monthly checks?

A lump sum is taxed the same way as monthly payments. If you are under 67, Michigan taxes the full amount at 4.25 percent. If you are 67 or older, it is exempt. The pension payer should withhold accordingly, but confirm with them before you receive the payment.

Can I claim a deduction for Michigan taxes I paid on my pension?

No. Michigan taxes are not deductible on your Michigan return. However, if you pay Michigan tax and also pay tax to another state, you may be able to claim a credit for taxes paid to the other state. Consult a tax professional for your specific situation.