Issue 3. Is the treatment of retirement income under 2023 PA 4, once fully phased in beginning in 2026, a return to the pre-2012 treatment?

Answer: Yes, with one exception. Prior to 2012, retirement income from federal and Michigan sources, including political subdivisions of Michigan, was totally exempt. Under PA 4, for the final phase-in year of 2026, and each tax year thereafter, subtractions of retirement income from these public sources are limited to the private retirement maximum under subsection 30(1)(f)(iv) of the MITA (except for taxpayers born before 1946, for whom retirement subtractions of public benefits remain unlimited). In applying the private retirement maximum, a taxpayer must combine all deductible public retirement income, whether it is federal, Michigan, or from another state government with a similar or reciprocal deduction, and any private retirement income and then apply the limitation to the combined amounts. See MCL 206.30(10)(d).

Example C : In tax year 2026, taxpayer Jamie, who was born after 1945, had the following income: Michigan public pension of $45,000, federal public pension of $26,000, federal taxable Social Security income of $12,000 and other income of $4,500 for AGI of $87,500. Jamie’s combined public pensions are $71,000. He may deduct his full retirement benefits up to the inflation-adjusted limit for private retirement benefits. For this example, assuming no inflation adjustments were made from 2023 to 2026, the maximum deduction is $61,518. Jamie can only deduct $61,518 of his $71,000 pension income.