Michigan is now in the final year of its shift in how retirement income is taxed. It only took four whole years. I guess time flies when you are having fun!

To understand where we are today, it helps to remember how the system works. The new law – passed in early 2023 – wasn’t designed to replace the old law in one fell swoop. Instead, the new law acts as an overlay and gradually gets more generous. This means retirees get to calculate their taxes under both systems and then choose whichever gives them the lower tax bill. Over time, the new law slowly pushes the old system aside.

Like the old law it replaced, the new tax law is organized by birth year.

Group A: For retirees born on or before 1945, nothing changed. They can continue deducting their retirement income up to about $66,000 for single filers or about $132,000 for married couples. Retirement income includes things like pension benefits and IRA distributions.

For the 2025 tax season that’s now underway – which was officially the third year of the transition – the new law gives these next groups of retirees a deduction equal to 75% of the retirement income subtraction enjoyed by the older retirees in Group A. 

Group B: For retirees born between 1946 and 1952, the old law still offers a blanket deduction of $20,000 for single filers or $40,000 for married couples. This deduction applies against all of their income, not just their retirement income.

If their pension and IRA distributions are big enough, this group of retirees might use the new law’s deduction. If not, they’ll just take the old law’s blanket deduction.

Group C: For retirees born between 1953 and 1958, the old law also allows that same $20,000 or $40,000 deduction against all types of income – but with a major catch.

Their deduction is reduced by the taxable portion of their Social Security benefits as well as their personal exemptions. Except in a few rare cases, the new tax law gives them a larger deduction than the old tax law offered.

As you might have noticed, Group B and Group C will always live in limbo between the old law and the new law. If not for tax software, it’s a bit ugly.

Group D: For retirees born between 1959 and 1966, they get to enjoy the same 75% of the retirement income subtraction given to the older retirees in Group A for the 2025 tax season. This group has been growing in size throughout the new law’s transition.

For those born after 1966, they didn’t quite qualify to get any retirement income deduction in the 2025 tax season. But, starting in 2026, their wait is now finally over. They’ll just merge into Group D above.

Starting this year, the new law’s four-year transition is officially complete. Every retiree will now receive 100% of the retirement income subtraction that older retirees in Group A have long enjoyed. It really is about time! 

Q: I’m planning to leave some money to charities when I die. But now that I’m looking more closely at my estate plan, I’m rethinking how I’ve got things set up. I’ve got the usual retirement accounts and brokerage accounts. What’s the best way to think about splitting things up?

A: It’s good to think this through. You are likely realizing that not all assets are taxed the same way and there might be an optimal way to divvy up your wealth.

To start, your regular IRA accounts (that is, your non-Roth IRAs) have never been taxed. When someone inherits them, every dollar is going to get taxed eventually. Unless the account goes to your spouse, your beneficiaries would have ten years to distribute it all. Obviously, that reduces their inheritance.

But, charities are treated differently. They don’t have to pay any taxes. So, if you name a charity as a beneficiary of your IRA, that money won’t ever get taxed. So, retirement money is often the most efficient pot to leave to charity.

On top of that, your after-tax brokerage or trust accounts, as well as your real estate, typically get a full step-up in cost basis when you die. This means your heirs can often sell those assets without facing a tax bill.

Given all of this, the most tax efficient strategy is kind of straightforward. Consider tweaking your estate plan so that your retirement accounts are used to fund your charitable intent and your other assets are left to the people in your life. Uncle Sam will get far less.

Q: My husband and I just got our tax return back and were surprised to see an added Net Investment Income Tax. We also thought we were going to see the new senior deduction from the new tax law, but it wasn’t there. What happened?

A: It looks like you got hit by some “tax torpedoes.” They are triggered when your income crosses above certain levels and suddenly new taxes show up or deductions start to disappear.

For a married couple, the Net Investment Income Tax appears when your modified adjusted gross income exceeds $250,000. Once that happens, you get to pay an extra 3.8% on your investment income. Think of it as an extra tax on your interest, dividends, capital gains and rental income.

The new senior deduction works similarly. You could have gotten up to a $12,000 deduction for being over age 65. But, once again, it looks like your income wiped it out completely. The phaseout started when your adjusted gross income reached $150,000. 

Interestingly, there might be yet another torpedo that you haven’t seen quite yet. That’s your Medicare Part B and Part D surcharge, known as IRMAA. It’s sneakier. Instead of hitting immediately, it’ll possibly show up early next year.

Q: We heard on the news that this might be the largest tax refund season in a long time. Why is this happening and why would anyone want a big tax refund?

A: Yes, it is likely this tax season will kick out one of the biggest piles of tax refunds in recent memory. The reason has to do with a big tax bill passed back in July of last year. While the bill was signed this past July, it was made retroactive back to the start of 2025. It created a number of new tax breaks.

Basically, there were three big ones. First, it introduced no federal tax on tips, up to certain limits. It also added a tax break for overtime pay. Again, up to a limit. Finally, it provided an additional “senior” deduction for those 65 and up.

But here’s the real reason for the large expected tax refunds when people file their returns. The IRS purposely didn’t provide updated information to payroll processors that would have allowed them to adjust workers’ tax withholding. In other words, too much was taken out of paychecks all along the way last year. This was presumably done on purpose to create large refunds in an election year.

While a big tax refund might feel a bit like a bonus, it’s really a sign the US Treasury held your money without paying you interest. Ideally, people should want their tax withholding set so they won’t owe much money or get much back at tax time.

Q: I’m a very young retiree, turning 59 this year, and I heard that I might now get a deduction in Michigan for my IRA withdrawals. I thought only older retirees got that break. Is this really true?

A: It is true. Starting this year, retirees born in 1967 or later will now benefit from Michigan’s retirement income deduction. This is the final year of a multi-year transition back to the old rules that used to exempt most retirement income from Michigan income tax.

Way back in 2011, Governor Snyder controversially signed a law that gradually began taxing pension and IRA distributions for younger retirees born after 1945. Then, starting in 2023, Governor Whitmer set the whole process in reverse. A new law was passed to basically bring back the old retirement income deduction. The reversal was done in phases. We’ve now reached the final year of that four year transition. It now applies to everyone.  

This year, for people born in 1967 or after, you can now fully deduct your retirement income from your Michigan tax return. It is subject to certain limits, of course. If you are married, the maximum deduction is around $135,000. If you are single, it’s about $67,000.  

By reaching age 59 this year, you’ve now crossed the threshold. You now join the ranks of most Michigan retirees who pay very little – or nothing at all – in state income tax!

Q: It looks like President Trump has directed the Justice Department to criminally investigate Fed Chair Jerome Powell over a building renovation project. Could it work to force Powell out?

A: Actually, this latest drama might have the opposite effect. Trump’s actions could keep Powell in place as Fed Chair beyond the scheduled end of his term.

By law, a Fed governor can continue to serve on the board until their successor is appointed by the President and confirmed by the Senate. Without a successor in place, there’s no automatic expiration and vacancy to fill. Trump can’t just get rid of him, unless he fires him for “cause.” In my view, the Supreme Court would strike down any attempt by Trump to fire him.

Here’s how this might play out.

The Senate Banking Committee is the first to act on any Fed nominee before it can reach the Senate floor for a full confirmation vote. And, one Republican committee member, Senator Thom Tillis of North Carolina, isn’t happy with this investigation. That’s an understatement.

Senator Tillis announced that he won’t vote in favor of any replacement for Powell until all of this investigation talk disappears. His no vote would deadlock the committee. Without his support, there is no confirmation and no successor to Powell.

Now, there is a special motion by the full Senate that could bypass the committee step, but that’d take 60 votes. That’s not going to happen. So, if the investigation continues, it looks like Powell could stay on as Fed Chair, by default, longer than planned. Either Trump faces this unintended consequence, or he backs down.

Q: I’ve heard that naming my trust as the beneficiary of my IRA can create problems. I don’t exactly know why that’s the case. Can you explain?

A: Naming a trust as your IRA beneficiary can work, but it’s something that has to be done carefully. It all comes down to language in your trust and whether or not it qualifies as a “see-through” trust.

What is a see-through trust? It’s a trust where all beneficiaries are clearly identifiable people. That means you aren’t also naming charities among your list of trust beneficiaries. If you add them to the mix, it can disqualify it as a “see through” trust.

If your trust qualifies as a see-through trust, things can go pretty smoothly. If it’s deemed a non-qualified trust, the IRA distribution rules can get more complex. 

If you died before your required minimum distributions (RMDs) started, the entire IRA has to be emptied within five years. Naturally, this shorter distribution period can increase the tax burden for some of your beneficiaries. The normal length is ten years.

If you died after your RMDs started, your beneficiaries’ IRA distributions can be stretched out over your remaining life expectancy (treating you very much like a zombie.)

This slower, longer distribution period might actually seem like a pretty nice deal. But, it also comes with an unintended consequence. Your successor trustee might have a longer-than-desired job ahead of them.