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2025 PA 24 amended the Michigan Income Tax Act to align state tax law with certain provisions of the IRC. Specifically, the public act amended section 30 of the MITA (MCL 206.30) to modify the definition of “taxable income” for purposes of determining Michigan income tax. Taxable income must now be calculated subject to the following adjustments:
(ee) Subject to the limitations under this subdivision, for tax years beginning after December 31, 2025 and before January 1, 2029, deduct, to the extent not deducted in determining adjusted gross income, an amount equal to the sum of the following deductions allowed to be claimed on the taxpayer’s federal income tax return for the same tax year:
(i) Qualified tips under section 224 of the internal revenue code. For a nonresident, only qualified tips that are attributable to services performed in this state may be deducted.
(ii) Qualified overtime compensation under section 225 of the internal revenue code. For a nonresident, only qualified overtime compensation that is attributable to services performed in this state may be deducted.
There are several key takeaways that taxpayers and preparers should note following the enactment of these statutory provisions.
Calculating the Deduction
2025 PA 24 modified the MITA to incorporate the definitions of “qualified tips” and “qualified overtime compensation” from sections 224 and 225 of the IRC, respectively. Eligibility for “qualified tips” and “qualified overtime compensation” will therefore be based on the federal deduction. Consequently, the allowable deduction against a taxpayer’s taxable income in Michigan should generally mirror the deduction taken on the taxpayer’s federal return for that same tax year. For more information on how these deductions are calculated at the federal level, including what constitutes “qualified” tips and overtime compensation, taxpayers and preparers should consult the ongoing guidance on the OB3 being issued by the Internal Revenue Service (IRS) on its website found at irs.gov/newsroom/one-big-beautiful-bill-provisions .
Additionally, taxpayers should note the language related to residency status included in 2025 PA 24. Residents may deduct on their Michigan return all qualified overtime compensation or qualified tips deducted on the federal return. If the taxpayer is a nonresident, only qualifying overtime compensation and qualified tips that are attributable to services performed in Michigan are eligible for deduction.
Tax Years Impacted
These deductions are only available for the 2026, 2027, and 2028 tax years. Importantly, the OB3 made the deductions available at the federal level beginning in tax year 2025. For the 2025 tax year, deductions for qualifying overtime compensation and qualified tips will not be available in Michigan. Under current law, the 2028 tax year will be the final tax year that these deductions are available at both the federal and state level.
Implementation
As further guidance is issued at the federal level regarding the implementation of the tax-related provisions of the OB3, Treasury may periodically review and reissue guidance for taxpayers and preparers on how Michigan tax law may be affected. Taxpayers should expect periodic updates and instructions beginning in the 2026 tax year.
Author:
Bureau of Tax Policy
PO Box 30828, Lansing, MI 48909
Treas_Tax_Policy@michigan.gov