Issue 2. What changes to deduction limits on retirement benefits did PA 4 make?

Answer. For most individuals, limits on the subtraction of retirement income that are based on year of birth and age in the tax year are rolled back over a four-year period beginning in 2023 (in other words, retirement income taxation is reduced over a phase-in period). Special rules apply to certain public safety officers and employees.

PA 4 added two new subsections within section 30 of the MITA, subsections (10) and (11). Over a four-year period beginning in 2023, subsection (10) phases out the deduction limits previously implemented in 2012. Subsection (10) maximums are subject to the limitations in subsection (1)(f)(iv) and must, therefore, be reduced by any public, military, Michigan National Guard, and railroad retirement deductions. The impact of subsection (10) of PA 4 on the various age groups is summarized below:

PA 4 does not impact taxpayers born before 1946 (Tier 1 taxpayers under PA 38). The retirement subtraction for these retirees continues to be unlimited for all retirement or pension benefits received from public sources. These retirees must still reduce the maximum allowable subtraction for any private retirement benefits by any public retirement benefit subtraction. Public retirement benefits in this context refers to retirement or pension benefits issued by any of the following: the federal government, including benefits paid by the Railroad Retirement Board; the State of Michigan; political subdivisions, agencies, or instrumentalities of Michigan; the Armed Forces; or the Michigan National Guard. Compensation from the Armed Forces is also fully deductible and must reduce the maximum allowable subtraction for private retirement benefits.

PA 4 does not limit the availability of the standard deduction for taxpayers who qualified under the law before PA 4. For example, certain taxpayers with little or no retirement or pension benefits may still maximize the available deductions by taking the standard deduction. See the “ Post-2011 Michigan Tax Treatment of Retirement Distributions ” section in this RAB for more information.

Tax Year 2023 – taxpayers born after 1945 and before 1959 may deduct combined public and private retirement benefits not to exceed 25% of the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA. For 2023, this maximum is $61,518 for single and married filing separate filers and $123,036 for joint filers, 25% of which is $15,380 and $30,759, respectively.

Tax Year 2024 – taxpayers born after 1945 and before 1963 may deduct combined public and private retirement benefits not to exceed 50% of the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA. For 2024, this maximum is $64,040 for single and married filing separate filers and $128,080 for joint filers, 50% of which is $32,020 and $64,040, respectively.

Tax Year 2025 – taxpayers born after 1945 and before 1967 may deduct combined public and private retirement benefits not to exceed 75% of the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA. For 2025, this maximum is $65,897 for single and married filing separate filers and $131,794 for joint filers, 75% of which is $49,423 and $98,846, respectively.

Tax year 2026 and each year thereafter – regardless of year of birth, taxpayers may deduct combined public and private retirement benefits up to the inflation-adjusted private retirement maximum under subsection (1)(f)(iv) of section 30 of the MITA. The inflation-adjusted maximum does not apply to the public retirement benefits of taxpayers born before 1946.

If a subtraction using the limitations above or a subtraction for Social Security income is claimed on a joint return for the year a spouse died and the surviving spouse has not yet remarried, the surviving spouse may use the phaseout method based on the older deceased spouse’s year of birth and subject to the limitations applicable to a single-filer return.

PA 4 also added subsection (11) to section 30 of the MITA, carving out a population of taxpayers who are not subject to the four-year phase-in of their deduction. For those retirees, beginning in tax year 2023, subsection (11) instead restores a full deduction of any public retirement benefits, to the extent a qualifying distribution is included in AGI. However, any public retirement benefits deduction claimed reduces the maximum private retirement benefits deduction. This subsection applies to recipients of retirement or pension benefits for services in Michigan as an employee of a public police or fire department, a state police trooper, a state police sergeant, or a corrections officer employed by a county sheriff in a county jail, work camp, or other facility maintained by a county that houses adult prisoners (see Issue 5). As a shorthand only, this RAB may refer to this class of service providers as “ public safety personnel ” or to the deduction as the “ public safety deduction .”

The provisions of subsections (10) and (11) of Section 30 of the MITA are elective. MCL 206.30(10) and (11). Taxpayers may choose the maximum deduction available under either provision, if applicable, or under subsection (9) (the tiered provisions and standard deduction that went into effect in 2012 under 2011 PA 38 and later amendatory acts).

Note: Where examples in this post-2011 section of the RAB involve both the standard deduction and taxable Social Security income, calculations may differ for tax years 2026 through 2028. See Issue 11.

Example A : Taxpayer Adam is the older spouse of a married couple filing jointly. He was born in 1956 and is 67 years old in tax year 2023. He and his spouse have retirement income of $40,000, taxable Social Security income of $12,000, and other income of $2,000, for AGI of $54,000.

Based on Adam’s age, the taxpayers fall into Tier 3. Under subsection (9), Tier 3 taxpayers are allowed no retirement income deduction. But because Adam, the older spouse, is 67, under subsection (9), the couple may choose to apply either the standard deduction of $40,000 against all income (in which case they cannot take a subtraction for taxable Social Security income or for personal exemptions) ($54,000 - $40,000 = $14,000) or they may forgo the standard deduction in favor of deducting taxable Social Security income and the personal exemption ($54,000 - $12,000 - $10,800 = $22,800). The standard deduction results in lower Michigan taxable income ($14,000 < $22,800).

Note: Michigan forms use a shortcut method to effectively ensure the lowest taxable income for filers calculating between these two subsection (9) options. The computation on the forms will automatically apply the standard deduction when that amount exceeds the sum of the taxpayer’s Social Security income and personal exemption subtractions. The taxpayer reports as though they are claiming Social Security income and the personal exemption, and a remaining amount, or “residual standard deduction,” is calculated and reported. Their Michigan taxable income would be calculated on forms as follows:

Amount Description $54,000 AGI - $10,800 Personal Exemption - $12,000 Taxable Social Security Income - $17,200 Residual Michigan Standard Deduction: (40,000 – 10,800 – 12,000) $14,000 Michigan Taxable Income

Alternatively, under subsection (10), for tax year 2023, Adam and his spouse may forgo the $40,000 standard deduction and instead deduct retirement income up to 25% of the private retirement maximum of $123,036, or $30,759 (.25 x $123,036). Therefore, the couple may subtract $30,759 of their $40,000 retirement income, plus 100% of taxable Social Security income and their personal exemptions.

The couple’s subtraction of $30,759 under subsection (10), plus the availability of their subtraction for Social Security income and personal exemptions ($30,759 + $12,000 + $10,800 = $53,559), is higher than their standard deduction of $40,000 under subsection (9). The retirement deduction option under subsection (10) would, therefore, be the more advantageous choice. Their Michigan return would appear as follows:

Amount Description $54,000 AGI - $30,759 2023 Joint phase-in deduction - $12,000 Taxable Social Security Income - $10,800 Personal Exemption $441 Michigan Taxable Income

Example B : Same facts as in Example A except Adam and his spouse had retirement income of $25,000, taxable Social Security income of $2,000, and other income of $15,000 for a total AGI of $42,000. The taxpayers are still Tier 3 taxpayers and are allowed no retirement income subtraction under subsection (9). But they may take a standard deduction of $40,000 against all income in computing Michigan taxable income (in which case they cannot take a subtraction for taxable Social Security income or for personal exemptions) ($42,000 - $40,000 = $2,000) or they may forgo the standard deduction in favor of subtracting taxable Social Security income and the personal exemption ($42,000 - $2,000 - $10,800 = $29,200). The standard deduction results in lower Michigan taxable income. Their Michigan taxable income would be calculated as follows:

Amount Description $42,000 AGI - $10,800 Personal Exemption - $2,000 Taxable Social Security Income - $27,200 Residual Michigan Standard Deduction* ($40,000 - $10,800 - $2,000) $2,000 Michigan Taxable Income

* The Michigan returns use the shortcut method explained in example A.

Alternatively, under subsection (10), for tax year 2023, Adam and his spouse may forgo the standard deduction and instead deduct retirement income up to 25% of the private retirement maximum of $123,036, or $30,759 (.25 x $123,036), plus their Social Security income and the personal exemptions.

Amount Description $42,000 AGI - $2,000 Taxable Social Security Income - $25,000 2023 Joint phase-in deduction - $10,800 Personal Exemption $4,200 Michigan Taxable Income

Since the couple’s phase-in retirement subtraction of $25,000 under subsection (10), plus the availability of their subtraction for Social Security income and personal exemptions ($25,000 + $2,000+ $10,800 = $37,800), is less than their $40,000 standard deduction, the option under subsection (9) is the more advantageous choice.