Michigan retirees of every birth year can subtract pension and retirement income from their state taxable income starting with tax year 2026, the Michigan Department of Treasury says, as the four-year phase-in that began in 2023 reaches its last step. The deduction is capped, and a retiree still picks one method each year, so the biggest subtraction depends on birth year and income.
For tax year 2026 the Treasury's retirement and pension benefits page lists the phase-in subtraction as “up to 100%” with no birth-date limit. A year earlier, for a taxpayer or oldest spouse born from Jan. 1, 1946 through Dec. 31, 1966, the subtraction was “up to 75%.”
What changed between 2025 and 2026
Michigan's 2023 law restored much of the pre-2012 break on a schedule. A Treasury guidance page says eligibility widens each year “until 2026, when everyone born after 1945 will be eligible for a subtraction of qualified retirement benefits included in adjusted gross income.” Retirees born before 1946 were already covered by the oldest rules.
The change is in the size of the cut, not a new form. For tax year 2025 the phase-in subtraction was 75 percent of the private pension limits, which were $49,423 for a single or married-filing-separately filer and $98,846 for a joint return. That works out to roughly $37,067 single and $74,135 joint for tax year 2025.
Does the full deduction apply on this year's return?
The question for a retiree is which of the methods gives the biggest subtraction on the 2026 return, which is filed in 2027. Treasury says a retiree may choose any one of three methods for which they qualify each year: the tier structure subtraction based on year of birth, the phase-in subtraction based on tax year, or the subtraction for qualified fire, police and corrections retirees.
A 2026 phase-in subtraction of up to 100 percent is not the same as a deduction with no ceiling. The page says the phase-in is based on private pension limits that are adjusted for inflation each year, and the maximum subtraction equals the combined private and public retirement benefits that are included in federal adjusted gross income. A 2026 dollar figure was not on the pages Treasury has posted so far, so the 2025 limits above are the most recent published.
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When the older tiers can still beat the new deduction
The older tiers did not go away. Treasury's 2025 instructions for the pension schedule, Form 4884, say retirees born from 1946 through 1959 can take either a Michigan standard deduction or a retirement subtraction. The standard deduction starts at $20,000 for a single filer and $40,000 for a joint return, and it rises by $15,000 when certain boxes are checked.
The instructions are blunt about the choice: “If your Michigan Standard Deduction results in a more beneficial subtraction, do not file Form 4884.” The worksheets add that a filer who picks one result “may claim only this subtraction.”
The 2025 instructions also set the older ceilings. Retirees born before 1946 and qualifying fire, police and corrections retirees could subtract up to $65,897 single or $131,794 joint of private benefits, with federal and Michigan public pensions subtractable in full. For those born from 1959 through 1966, the 2025 limit was $49,423 single or $98,846 joint. Under the old rules, those born after 1966 got no retirement subtraction unless another section applied.
A Treasury guidance page describes a third route for older filers. After age 67, a taxpayer may subtract the Michigan standard deduction against all income, reduced by the personal exemption and certain military and retirement amounts. Age is based on the taxpayer, or the older spouse on a joint return.
How to pick the tier before filing
The pages say a distribution first has to count as a qualified one under the 1099-R rules and the plan's retirement terms. If it does not, neither the tier subtraction nor the phase-in applies. The Treasury recommends its retirement and pension estimator and advises consulting a qualified tax preparer.
For a married couple, the older spouse's birth date sets the tier. A couple with one public pension and one private pension should compare the combined subtraction under each method rather than assume the new 100 percent figure wins, since public pensions can be subtracted in full under the older tier for those born before 1946.
Retirees with a 2026 Michigan return can start now by adding up 2026 pension, IRA and annuity income on their 1099-R forms, then comparing the Treasury's three methods once the 2026 forms are published. The Treasury's 2025 pension schedule instructions are the closest guide until then.
Which Michigan tier fits this year's pension income?
A Michigan retiree who assumes the new 100 percent figure wins can overpay if the standard deduction or an older tier would have taken more off the return. The same retiree may also be missing where Social Security starts to be taxed on the federal side.
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This article was produced with AI assistance and edited for accuracy against the sources linked above.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
