Michigan workers won’t see tax deductions for tips and overtime on their 2025 state income tax returns. But they are getting these tax breaks when they file state returns next year for income earned in 2026.
The temporary breaks — which apply to the 2026, 2027 and 2028 tax years on Michigan income tax returns — were part of a state budget deal reached by Gov. Gretchen Whitmer and legislative leaders last September.
House Speaker Matt Hall, R-Richland Township, told the Detroit Free Press last year that the tax breaks were “red lines” that had to be part of a budget agreement. Michigan taxpayers would be rightly annoyed to discover tip income and overtime income were still subject to Michigan income tax, Hall said then, if they received such tax breaks on the federal return.
And some more favorable tax breaks are set to begin in 2026 for many seniors, too.
Older adults in Michigan have two new things coming into play in 2026. We’re looking at final, full phase-in for some pension and retirement tax reforms that began in 2023. And for Michigan seniors not deducting retirement benefits, a bigger deduction on state returns related to Social Security benefits begins in 2026.
How Michigan will treat some One Big Beautiful Bill deductions
Michigan only adopted two of four specific but temporary tax breaks for individuals created in the One Big Beautiful Bill Act — the tax deductions on tip income and overtime.
Adults 65 and older will not see the same tax break as the enhanced deduction for seniors on the Michigan income tax return for 2026. In addition, new car buyers will not be able to deduct their car loan interest on Michigan state income tax returns related to the cars or trucks with final assembly in the United States deduction.
Both the car loan and senior deductions are part of the One Big Beautiful Bill Act and will apply to federal income tax years for 2025, 2026, 2027 and 2028.
What to do on Michigan returns if you qualified for federal deductions
So, what happens if you claimed a deduction for tips, overtime, car loans or seniors on a 2025 federal return being filed now? What do you do when you can’t take a similar deduction on state returns? Do you have to somehow add income back to the Michigan return?
Will it be a headache to do things one way on federal returns and another on state returns if you claim a deduction for tips or a deduction for overtime on your 2025 federal income tax return or the deduction for those 65 and older?
It shouldn’t be an issue, according to experts.
Why? The federal deductions for tips, overtime income, car loan interest, and seniors will not reduce one’s adjusted gross income on a federal return. These deductions are calculated on Schedule 1-A and later reported on the 1040, 1040-SR, and 1040-NR.
The actual deductions end up reducing any taxable income you have for 2025.
The new federal deductions — which apply to those who itemize and those who don’t — do not reduce your adjusted gross income.
“Those deductions won’t be reflected in the AGI number that serves as the starting point of the Michigan return,” said Ron Leix, a Michigan Treasury spokesperson.
When it comes to the Michigan income tax return for individuals, you take your adjusted gross income, not your taxable income, from your federal return and place that number on the state return.
Leix noted that taxpayers who claim these new federal deductions on their federal returns won’t need to do anything to add back income on the Michigan income tax return.
What is the income tax rate in Michigan?
Michigan has a flat 4.25% rate for its individual income tax rate on 2025 returns.
As of March 13, the Michigan Department of Treasury reported that more than 2.4 million state income returns had been processed and more than $1.43 billion in refunds had been issued.
What will happen next year on 2026 state income tax returns?
The Michigan state income tax deductions relating to tips and overtime will be reported as new deductions somewhere on the 2026 Michigan return, which you’ll file in 2027, Leix said. The 2026 state form will be developed this year before next year’s tax season.
Michigan’s tips and overtime deductions that apply next tax season were created under Public Act 24 of 2025 and launch in tax year 2026. The deductions apply to tip income and overtime income earned in Michigan.
A handful of states that use “rolling conformity” with the federal tax code will automatically reflect some of these new federal deductions relating to tip income, overtime pay, car loans and an extra deduction for seniors unless they pass laws to opt out, said Lucy Dadayan, principal research associate for the Urban-Brookings Tax Policy Center.
She noted that states must decide whether to conform to federal tax law because many state income tax systems start with federal taxable income.
“Some adopt the changes automatically for administrative simplicity,” she said, “and to provide similar tax relief to residents. Others choose not to conform because the deductions could significantly reduce state tax revenue and affect budgets.”
How some Michigan retirees will see tax changes ahead
This tax season, the real headaches could continue to throb at tax time for older adults in Michigan.
Michigan taxpayers who are retired continue to face tax prep anxiety with the mind-numbing rules relating to pensions and retirement income on Michigan state income tax returns.
For Michigan’s retirees, 2025 state income tax returns remain confusing as older adults try to figure out how much state income tax they owe on pensions and retirement benefits. Options exist to reduce their tax bill, but it’s not an easy task for many individuals to figure out what works best for them.
In 2023, Whitmer and the state Legislature moved to roll back the contrived, age-based system that went into place in 2012 after then Republican Gov. Rick Snyder successfully pushed a controversial plan through the Legislature to tax the pension and 401(k) incomes of millions of retirees.
The new state law in 2023 had some clear winners. Pension income for public police officers and firefighters, county correction officers, and state troopers and sergeants became exempt from Michigan income tax beginning in 2023.
The reality, though, is that many other Michigan retirees ended up facing a bewildering set of rules that were designed to phase into place each year during the 2023, 2024 and 2025 tax years relating to various ages and retirement income.
“The Michigan retirement and pension subtractions are still a headache in 2025,” said Lisa Pohl, principal and director for state and local tax for Rehmann in Grand Rapids.
Taxpayers, she said, often are required to calculate their tax liability using two different methods and then choose the option that produces the lower tax bill.
Under the law for 2025, Michigan uses a three-tier system where a taxpayer’s birth year determines how retirement income is taxed. For married couples filing jointly, the treatment of retirement income is based on the birth year of the older spouse. The subtraction applies to eligible retirement income and reduces Michigan taxable income.
The “phase-in subtraction” calculation was designed to be more generous over time. The phase-in formula, based on the new law, now is up to 75% of private pension limits in 2025. And it applies to a wider range of birth years.
For the 2025 tax year, the phase-in option applies to retirees born between Jan. 1, 1946 and Dec. 31, 1966.
For the 2025 tax year, the maximum subtraction under private pension limits is $49,423 if single or married filing separately, and $98,846 if married filing jointly.
The Michigan Treasury department has several tools on its website to help taxpayers, and the tax forms provide several worksheets to calculate the options.
Even so, the state itself cautions that the rules are complex.
The state website states: “Retirees may need to consult the advice of a qualified tax preparer to ensure they are able to deduct the maximum amount of retirement benefits.”
Some good news: The rules will not vary year to year beginning in 2026, as the phase-in will be complete.
“Beginning with tax year 2026, Michigan has effectively phased out its state income tax on most retirement and pension benefits, including defined-benefit pensions, IRA distributions, and other qualifying retirement income,” according to a Kiplinger breakdown on how all 50 states tax retirees.
The Kiplinger guide noted that Michigan’s Public Act 4 of 2023 and Public Act 24 of 2025 updated the state’s tax code “so that retirement and pension benefits are largely exempt from taxable income and allow the use of multiple deductions starting with the 2026 tax year.”
Yet Pohl still expects confusion to persist as retirees continue to evaluate which option works best for their situation and determine what income qualifies for a subtraction.
Retirement and pension benefits, according to the state, generally include most income reported on Form 1099-R. This includes defined benefit pensions, IRA distributions, and most payments from defined contribution plans.
Beginning with the 2026 tax year, everyone born after 1945 will be eligible for a subtraction of qualified retirement benefits included in adjusted gross income.
Starting in 2026, all retirees — regardless of birth year — will be able to deduct up to 100% of a set amount of retirement or pension income. That maximum amount will continue to change each year, Pohl noted.
Another significant change takes place in 2026 on Michigan income tax returns, which was part of Public Act 24 of 2025.
Currently, someone born after 1952 generally cannot exempt any retirement income other than Social Security income, until reaching age 67.
After turning 67, they must choose between a $20,000 deduction for single filers — or $40,000 for joint filers — against all income, or they can opt to continue to exempt Social Security income and claiming other personal exemptions.
Beginning in the 2026 tax year, taxpayers born after 1952 who are age 67 or older will be able to claim both the standard deduction and the Social Security deduction for tax years 2026, 2027, and 2028. However, the Michigan Treasury notes that if a taxpayer takes the $20,000 or $40,000 deduction and deducts Social Security income, the taxpayer may not also claim standard personal exemptions.
The change here, according to the Treasury, will only impact taxpayers born after 1952 who receive Social Security income and claim the standard deduction on their Michigan individual income tax return.
“It does not impact taxpayers who do not claim the standard deduction on their return, such as taxpayers who elect to deduct their retirement and pension benefits,” according to the Treasury.
Those deducting retirement benefits will not see any change related to Social Security benefits, according to Leix.
The Michigan Department of Treasury notes online that for some Michigan taxpayers, the adjusted gross income on their federal return may include a portion of their Social Security income. Michigan law, though, allows taxpayers to deduct Social Security income included in AGI that flows through to the Michigan return.
For those opting to use the standard deduction against all income for tax year 2025, specifically those born after 1952 and aged 67 or older, the standard deduction amount is effectively reduced by any Social Security benefits included in AGI, Leix said.
For tax years 2026 through 2028, Leix explained, the standard deduction amount will not be affected by any Social Security benefits included in AGI, so the standard deduction amount is larger.
The complexities relating to retirement income on Michigan returns, of course, could make some people simply want to keep working. Or give someone else a job and have them do your tax returns in retirement. Hey, it will all work out somehow — and many could indeed save more tax dollars when they file 2026 Michigan income tax returns next year.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.
This article originally appeared on Detroit Free Press: Confused by Michigan taxes? Tip, overtime and senior rules explained
Reporting by Susan Tompor, Detroit Free Press / Detroit Free Press
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