As Bob Dylan declared, the times they are a-changin’. The tax picture for Michigan retirees remains in flux. The 2024 tax season now brings us the “50% phase in” of Michigan’s new retirement income tax law.
As a refresher, the new law acts as an “overlay” on top of the old law and retirees get to choose the law that treats them best. Year after year, the new law is slowly winning the battle. Here’s how it works.
Group A: For those born on or before 1945, there is no change. These retirees get to deduct their retirement income up to about $64,000 (single) / $128,000 (married) for 2024. Retirement income includes things like pension benefits and IRA distributions.
Group B: For retirees born in 1946 through 1952, they either get to deduct $20,000 (single) / $40,000 (married) against all types of income or they can use 50% of the new law’s deductions specifically against their retirement income. They can deduct their retirement income up to about $32,000 (single) / $64,000 (married.) Note, this is 50% of what Group A gets to deduct as shown above. They can choose the deduction level that’s best for them.
Group C: For retirees born in 1953 through 1957, they also either get to deduct up to $20,000 (single) / $40,000 (married) against all types of income – with an added catch – or they, too, can use 50% of the new law’s deductions specifically against their retirement income.
The catch is the old law’s deduction amount is weakened because it is reduced by the taxable portion of their Social Security benefits and their personal exemptions. With each passing year, the new law crushes the old law.
Note, once people reach age 67, they enter into this group. Thankfully, in the years to come, it’ll completely eliminate the next group of younger retirees.
Group D: For retirees born in 1958 through 1962, the old law provides no deduction. The new law wins, by default. For the 2024 tax year, they also get 50% of the new law’s deductions against their retirement income just like the previous two groups.
Group E: For those born in 1963 through 1966, they will have to wait for the 2025 tax year to see the benefits of the third “phase in” of the new law. They get no deduction in 2024.
Group F: For those born after 1966, they will have to wait for the fourth and final “phase in” during the 2026 tax year. They get no deduction in 2024 or 2025.
To recap history, the 2023 tax year phased in 25% of the full deduction and the 2024 tax year is now phasing in 50%. Looking forward, 2025 will bring us a 75% phase in and 2026 will allow everyone to enjoy 100% of the retirement income deduction. I’m looking forward to 2026!
