Michigan has not repealed its pension tax, and no repeal is currently scheduled

Michigan taxes retirement income from pensions and distributions from retirement accounts like 401(k)s and IRAs. The tax rate is 4.25% on most pension income. There is no pending legislation with a firm repeal date, and the tax has remained in place since 2011 when it was introduced. If you receive pension income in Michigan, you should expect to owe this tax unless your specific income type falls under one of the narrow exemptions that already exist.

The tax applies to most people who receive pension payments while living in Michigan, regardless of where they worked or when they retired. It does not matter if you retired from a Michigan employer or an out-of-state one — if you live in Michigan and receive the income, the state taxes it. The only way to avoid it currently is to move out of state before you begin receiving distributions, or to fall into one of the existing exemptions.

Key Takeaways

  • Michigan's 4.25% pension tax has been in place since 2011 and remains active with no repeal date set.
  • The tax applies to pension payments, 401(k) distributions, IRA withdrawals, and similar retirement income received while you live in Michigan.
  • Military pensions and some federal employee pensions are exempt, but most private and public sector pensions are taxed.
  • Repeal efforts have been proposed in past legislative sessions but have not advanced to a vote or become law.
  • Your residency status on the date you receive income determines whether Michigan taxes it, not where you worked.

Why the tax exists and why it has not been repealed

Michigan introduced the pension tax in 2011 as part of a broader tax restructuring. The state lowered the income tax rate from 4.35% to 4.25% at the same time, but applied the new rate to retirement income that had previously been exempt. The stated purpose was to broaden the tax base and offset revenue loss from the rate reduction.

Repeal efforts have surfaced in the Michigan legislature multiple times over the past decade, usually introduced by Republican lawmakers. However, these bills have not moved past committee or received votes on the full chamber floor. Repealing the tax would reduce state revenue by an estimated amount that varies depending on the year and economic conditions — a cost that Democratic-controlled legislatures have been unwilling to absorb without offsetting cuts or new revenue elsewhere. The political composition of the Michigan House and Senate has shifted, but no repeal has reached the governor's desk.

Which retirement income is taxed and which is exempt

Michigan taxes distributions from IRAs, 401(k)s, 403(b)s, and similar defined-contribution plans. It also taxes payments from defined-benefit pension plans — the traditional monthly pension checks from employers. The 4.25% rate applies to the full amount of each distribution or payment you receive.

Exemptions exist for military pensions, federal employee pensions (including those from the U.S. Postal Service and federal civilian workforce), and certain railroad retirement benefits. Social Security is not taxed by Michigan. If you receive income from multiple sources — for example, a military pension plus an IRA withdrawal — only the non-military income is subject to the tax.

Some people mistakenly believe that pension income is exempt if they are over a certain age or if they worked for a public employer. This is not accurate in Michigan. Public school teachers, university employees, and state workers all pay the pension tax on their retirement distributions unless they fall into the military or federal employee category.

How the tax is withheld and reported

If you receive a pension or retirement distribution, Michigan requires the payer to withhold the 4.25% tax before sending you the money. Your pension administrator, IRA custodian, or 401(k) plan trustee should be withholding this automatically. The withheld amount appears as a separate line item on your 1099-R form, which you receive each January for the prior year's distributions.

You report the tax withheld on your Michigan tax return using Form MI-1040. The withheld amount is credited against your total Michigan tax liability for the year. If too much was withheld, you receive a refund; if too little, you owe the difference when you file. Some retirees find that the withholding is insufficient if they have other income, so they end up owing money at tax time.

If your payer is not withholding the tax — which occasionally happens with out-of-state administrators unfamiliar with Michigan law — you are still responsible for paying it. You can request that the payer begin withholding, or you can pay the tax directly to Michigan when you file your return.

What happens if you move out of Michigan

If you move out of Michigan before you begin receiving retirement distributions, you will not owe Michigan's pension tax on those distributions. Michigan taxes retirement income only if you are a resident on the date you receive it. Residency is determined by where you maintain your primary home and where you intend to live — not by where you worked or where your pension is paid from.

If you move to another state that also taxes pensions, you will owe that state's tax instead. Some states, like Florida and Texas, do not tax retirement income at all. Others tax it at rates lower than Michigan's 4.25%. If you move to a state with no pension tax, you can avoid the tax entirely by establishing residency there before your first distribution.

The timing matters. If you receive even one distribution while you are still a Michigan resident, that distribution is taxed. You must change your residency before the distribution is paid, not after. This typically means updating your driver's license, voter registration, and mailing address with your new state, and establishing ties like a lease or mortgage in the new state.

Proposed changes and legislative history

In 2019 and 2021, Republican-sponsored bills were introduced in the Michigan House to repeal the pension tax. These bills did not advance. In 2023, similar repeal proposals were introduced but did not move to a vote. The most recent legislative activity has been limited to discussion in committee, with no bill reaching a floor vote in either chamber.

Some proposals have suggested phasing out the tax over time rather than repealing it immediately, or exempting certain groups like seniors over age 67. None of these alternatives have been enacted. The current tax remains unchanged at 4.25% with the same exemptions that have existed since 2011.

Changes to Michigan's pension tax would require passage by both the House and Senate and signature by the governor. With divided government in recent years and competing budget priorities, repeal has not been a priority for the majority party. If you are planning your retirement or considering a move, you should not assume the tax will be repealed in the near term.

Planning around the pension tax if you are still working

If you are still employed and contributing to a retirement plan, you can reduce the impact of the pension tax by maximizing contributions to tax-advantaged accounts. Contributing more to your 401(k) or 403(b) reduces your current taxable income, though the distributions will be taxed when you withdraw them. This is a timing strategy, not a way to avoid the tax entirely.

Some people consider moving out of Michigan before retirement specifically to avoid the pension tax. This works only if you establish residency in another state and maintain it before you begin taking distributions. Moving after you have already started receiving income will not help, because you will owe Michigan tax on distributions received while you were a resident.

If you have a choice of when to begin taking distributions — for example, if you can delay an IRA withdrawal or choose between a lump sum and monthly pension payments — the timing of your Michigan residency should factor into that decision. Consulting with a tax professional who understands Michigan's rules can help you understand the tax impact of different withdrawal strategies.

Frequently Asked Questions

Does Michigan tax Social Security?

No. Michigan does not tax Social Security benefits. Only retirement account distributions and pension payments are subject to the 4.25% tax. If Social Security is your only retirement income, you owe no Michigan pension tax.

If I worked for the federal government, is my pension exempt?

Yes. Federal employee pensions, including those from the U.S. Postal Service and the federal civilian workforce, are exempt from Michigan's pension tax. Military pensions are also exempt. If you have both a federal pension and an IRA, only the IRA distributions are taxed.

Can I avoid the tax by having my pension paid to an out-of-state address?

No. The tax is based on your residency, not where the check is mailed. If you live in Michigan when you receive the distribution, Michigan taxes it, regardless of the mailing address on file with your pension administrator.

What if I move to Michigan after I have already started receiving retirement income?

Once you move to Michigan, you become subject to the pension tax on all future distributions received while you are a resident. Distributions you received before moving to Michigan are not taxed by Michigan. Only income received after you establish residency is taxed.

Has there been any recent movement toward repealing the tax?

No repeal has been enacted or scheduled. Repeal bills have been introduced in recent legislative sessions but have not advanced to a vote. The tax has remained at 4.25% since 2011 with no changes to the rate or exemptions.