Income Tax Rate Change: Overview

What changed? A 2023 income tax rate reduction from 4.25% to 4.05% was announced March 29, 2023.

Who is impacted by this change? The lower 4.05% tax rate applies to all Michigan taxable income originating in the 2023 tax year (January 1, 2023 through December 31, 2023) that is: received by individuals and fiduciaries. employer and pension administrator withholding obligations.

Why was 4.05% selected for the 2023 reduced income tax rate? When applicable, the reduced income tax rate is calculated based on economic conditions. MCL 206.51(1)(c) outlines the income tax rate reduction calculation. While 4.05% is the current reduced income tax rate for tax year 2023, future reduced rates may be a different percentage.

Is this a permanent change to Michigan’s income tax rate? No, the 4.05% income tax rate is only in effect for the 2023 tax year. On January 1, 2024, the income tax rate in Michigan will return to 4.25%.

Why did the income tax rate only change for tax year 2023? The income tax rate may decrease each tax year if certain economic conditions are met during the last state fiscal year (October 1st – September 31st). As soon as prior fiscal year financial data is reviewed, Treasury will announce if there will be a reduction to the income tax rate.

Why was the 2023 income tax rate changed during the tax year? The decision to reduce the income tax rate can only be made once financial data from the last fiscal year is published in the Annual Comprehensive Financial Report. The financial report for fiscal year ending September 31, 2022 was published in March 2023. Revenue growth and inflation metrics were analyzed immediately. As a result, the 2023 income tax rate was lowered and announced. Typically, the prior fiscal year financial report is not published until after the beginning of the tax year. Therefore, if economic conditions call for a future income tax reduction, we may continue to see the lowered rate announced after the beginning of a tax year.

Where can I find more information about the 2023 Michigan income tax rate change? 2023 Tax Policy Notice re: Income Tax Rate Change 2023 Income Tax Rate Press Release

What is the relationship between Michigan income tax and Michigan withholding tax? The tax rate is the same. The taxpayer is different. Income tax applies to individuals and fiduciaries. Individuals and fiduciaries are subject to income tax, and generally have federal and state-level income tax liabilities. Individuals and fiduciaries who receive a W-2 have had income tax withheld on their behalf. When they file income tax, they receive credit toward their total tax obligation based on the W-2. Withholding tax applies to businesses and persons that have employees or administer pensions. Generally, businesses are subject to withholding tax. If these taxpayers have employees or retirees, they must withhold federal and state income tax from compensation paid to employees.

Does the lowered income tax rate impact whether I owe tax or not? While the income tax rate reduction changes the amount of tax owed to Michigan, it does not change whether tax applies to a person, business, or fiduciary.

Will Treasury publish revised 2023 withholding tables to reflect the income tax rate change? No, the 2023 withholding tables were published at the beginning of the tax year to provide guidance for calculating tax due at the 4.25% income tax rate. They will not be updated to reflect the 2023 reduced income tax rate of 4.05%. Treasury takes a neutral position on adjusting withholding amounts based on the income tax rate change. Businesses may choose to continue withholding at 4.25% or refigure withholding calculations using the reduced 2023 income tax rate of 4.05%. If withholding amounts are not adjusted, employees will receive the adjustment when filing their Michigan income tax return, via a larger refund or less tax owed.