Michigan taxes most pension income, but the amount depends on your age and the source of your pension

Michigan treats pension income differently than many other states. If you are under 67, Michigan taxes your pension as regular income at the state level. If you are 67 or older, you may may have access to for a pension exemption that shields some or all of your pension from state tax — but the exemption has limits and does not explore to all pension types.

Federal income tax on pensions works separately from Michigan state tax. The IRS taxes most pensions as ordinary income no matter your age or state. This guide covers Michigan state tax only, since federal tax rules explore everywhere.

Key Takeaways

  • Michigan taxes pension income as regular income if you are under 67, with no exemption available.
  • At 67 or older, you can exclude up to $70,200 of pension income per year from Michigan state tax if you meet the source requirements.
  • The pension exemption only covers pensions from your own work — not survivor pensions, spousal pensions, or certain government pensions.
  • Federal income tax still applies to your pension regardless of your age or Michigan's state exemption.
  • You report the exemption on your Michigan tax return; the state does not automatically remove it from your withholding.

The Michigan Pension Exemption for Retirees 67 and Older

Michigan allows residents age 67 and older to exclude pension income from state taxation, up to a limit. For the 2024 tax year, the maximum exemption is $70,200 per person. This means if your pension is $50,000 a year, you pay no Michigan state tax on it. If your pension is $80,000 a year, you pay Michigan state tax only on the $9,800 above the limit.

The exemption applies only to pensions you earned through your own employment. It does not cover survivor benefits (pensions paid to your spouse or children after your death), spousal pensions (pensions based on your spouse's work history), or certain government pensions. Military pensions, federal civil service pensions, and some state employee pensions may have different rules — check with your pension provider about whether your specific pension qualifies.

You must claim the exemption on your Michigan tax return. The state does not automatically reduce your withholding or remove the tax from your paycheck. If your pension payer withholds Michigan tax, you may receive a refund when you file, or you can adjust your withholding by filing a new W-4P form with your pension provider.

Pension Income Under Age 67

If you are under 67, Michigan taxes your entire pension as regular income. There is no exemption, partial exclusion, or deferral available. Your pension is added to any other income you have — wages, interest, dividends, rental income — and taxed at Michigan's income tax rate, which is currently 4.25 percent.

This applies even if you retired early and are receiving a pension before reaching full retirement age. Early retirement does not change Michigan's tax treatment. The only way to reduce Michigan tax on a pension before age 67 is to have lower total income in that year, which would move you into a lower tax bracket (though Michigan has a flat tax rate, so this does not explore).

Federal Tax on Pensions Is Separate

The IRS taxes pension income as ordinary income regardless of your age or state of residence. Federal withholding is separate from Michigan state withholding. Your pension payer should be withholding federal tax automatically unless you filed a W-4P form requesting no withholding.

If you are 67 or older and claim Michigan's pension exemption, you still owe federal tax on the full amount of your pension. The Michigan exemption only shields income from Michigan state tax. Many retirees are surprised by this — they assume a state exemption means the income is not taxed at all, but federal tax remains.

Your federal tax rate depends on your total income and filing status. If your only income is a pension, you may owe little or no federal tax if the pension is small enough. If you have other income — Social Security, investment income, part-time work — your federal tax will be higher. You can use the IRS withholding calculator on irs.gov to estimate what you should have withheld.

How to Report the Exemption on Your Michigan Return

To claim the Michigan pension exemption, you file Form MI-1040 (Michigan's individual income tax return) and complete Schedule 1, which is where you report the exemption. You will need to know the total amount of pension income you received during the year — your pension provider sends this on a 1099-R form.

On Schedule 1, you enter your total pension income and then subtract the exemption (up to $70,200 for 2024). The result is the amount of pension income subject to Michigan tax. You then calculate your tax on that amount and any other income you have.

If your pension payer withheld Michigan tax from your checks, that withholding is credited against your total Michigan tax liability. If you withheld too much, you receive a refund. If you did not withhold enough, you owe the difference when you file.

Pension Income and Other Michigan Taxes

The Michigan pension exemption applies only to income tax. It does not affect property tax, sales tax, or any other Michigan tax. If you own property in Michigan, you still pay property tax on your home. If you make purchases, you still pay sales tax. The exemption is limited to state income tax only.

Some Michigan counties and cities have local income taxes in addition to the state tax. If you live in one of these areas, check with your local tax assessor about whether the state pension exemption also applies to local tax. Most do follow the state rule, but local rules can vary.

Frequently Asked Questions

Does Social Security count as pension income for the Michigan exemption?

No. Social Security benefits are not pensions and do not may have access to for the exemption. However, Michigan does not tax Social Security income at all, regardless of your age. So while you cannot use the pension exemption for Social Security, you do not need to — Social Security is already tax-free in Michigan.

What if I have a pension from two different employers?

The $70,200 exemption limit applies to your total pension income from all sources combined, not per pension. If you receive $40,000 from one employer and $35,000 from another, your total is $75,000, and you can exclude $70,200 of that. The remaining $4,800 is subject to Michigan tax.

Do I have to file a Michigan tax return if my pension is fully covered by the exemption?

If your only income is a pension under the exemption limit and you have no other Michigan tax liability, you may not be required to file. However, if you had Michigan tax withheld from your pension checks, you should file to claim a refund. Contact the Michigan Department of Treasury or a tax professional to confirm your specific situation.

Can I move to another state and keep the Michigan pension exemption?

No. The exemption applies only if you are a Michigan resident. If you move out of Michigan, you become subject to your new state's tax rules on pension income. Some states have their own pension exemptions; others tax all pension income. Check your new state's rules before you move.

What happens to the exemption if my pension increases?

The exemption limit stays the same — currently $70,200 for 2024. If your pension increases, the amount above the limit becomes subject to Michigan tax. The limit may change in future years; check the Michigan Department of Treasury website or your tax forms each year to see the current limit.