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!
