Michigan does not tax most pension income, but the rules depend on your age and the source of your pension

Michigan exempts most pension and retirement distributions from state income tax. If you receive a pension from a former employer, military service, or a public employee retirement system, you generally pay no Michigan tax on that income. However, distributions from IRAs and 401(k)s are taxed as regular income unless you are 59½ or older. The state also taxes some retirement income sources that other states do not, so your total tax picture depends on which accounts your money comes from and when you started withdrawing.

This matters because a pension that is tax-free in Michigan might be taxed in another state, and moving to Michigan in retirement can change what you owe. It also matters because some retirees have multiple income sources — a pension, Social Security, IRA withdrawals — and only some of those are exempt.

Key Takeaways

  • Pensions from employers, the military, and public employee systems are not taxed by Michigan, regardless of your age.
  • Withdrawals from IRAs and 401(k)s are taxed as regular Michigan income unless you are 59½ or older, in which case they are exempt.
  • Social Security benefits are not taxed by Michigan under any circumstance.
  • If you receive a pension from a non-Michigan source, you still owe no Michigan tax on it, but you may owe tax to the state where the pension originated.

Which pensions are exempt from Michigan tax

Michigan tax code exempts pensions paid by a former employer, the U.S. military, or a public employee retirement system. This includes pensions from the Michigan Public School Employees' Retirement System (MPSERS), the Michigan Employees' Retirement System (MERS), and the State Police Retirement System. It also includes pensions from private employers — a pension from Ford, General Motors, or any other company is not taxed by Michigan.

The exemption applies to the full amount of the pension, no matter how much you receive each month. There is no income limit that phases out the exemption. If you are receiving a pension check, you do not report it as income on your Michigan tax return.

This exemption is permanent and does not change if you move to Michigan after retirement or if you were working in another state when you earned the pension. A pension earned in Ohio or California remains exempt from Michigan tax once you move here.

How IRA and 401(k) withdrawals are taxed differently

Money you withdraw from an IRA, 401(k), 403(b), or similar retirement account is treated as regular income by Michigan, not as a pension. This means it is subject to Michigan's income tax rate unless you meet an age exception. If you are under 59½ and withdraw from these accounts, the full withdrawal is taxable income in Michigan.

Once you reach 59½, withdrawals from IRAs and 401(k)s become exempt from Michigan income tax. This is a significant difference from the pension exemption, which has no age requirement. The exemption applies to all withdrawals once you turn 59½, whether you withdraw $5,000 or $50,000 in a single year.

If you are between 59½ and full retirement age and have both a pension and IRA withdrawals, only the IRA withdrawals are exempt. Your pension is already exempt regardless of age. This distinction matters if you are managing your income to stay below a certain threshold for Medicare premiums or other purposes.

Social Security and other income sources

Michigan does not tax Social Security benefits under any circumstance. This applies whether you are 62, 70, or older, and whether you are still working or fully retired. You do not report Social Security on your Michigan tax return.

Distributions from Roth IRAs are also not taxed by Michigan, since Roth withdrawals are considered a return of your own contributions, not taxable income. However, if you convert a traditional IRA to a Roth, the conversion itself is a taxable event in Michigan in the year it occurs.

Interest, dividends, and capital gains from investments are taxed by Michigan as regular income. Annuity payments that are not part of a may have access to retirement plan are also taxable. If you are unsure whether a specific income source is taxed, the source of the payment — employer pension, IRA, brokerage account — determines the treatment.

What to report on your Michigan tax return

On Form MI-1040, you report all income sources, then claim exemptions for the ones that may have access to. You will list your pension income on the return, but then subtract it as an exemption on the same form. The result is that your taxable income does not include the pension amount. You do the same for IRA or 401(k) withdrawals if you are 59½ or older.

You need to gather the forms your pension provider sends you. Most employers and retirement systems send a 1099-R form showing the amount paid to you during the tax year. You will also receive a 1099-R for any IRA or 401(k) withdrawal. Bring these forms when you file, or enter the amounts from them into your tax software.

If you are filing by mail, attach copies of your 1099-R forms to your return. If you are filing electronically through tax software, you will enter the information from the 1099-R into the appropriate fields. The software will calculate the exemption automatically once you indicate that the income is from a pension or may have access to retirement account.

Nonresident and part-year resident situations

If you moved to Michigan during the tax year, you file as a part-year resident. You report all income you received while living in Michigan, including pension income. The pension exemption still applies — you do not pay Michigan tax on pension income for the months you lived here. However, you may owe tax to the state where you lived before moving, depending on that state's rules.

If you are a nonresident receiving a Michigan pension, you do not owe Michigan tax on it. However, you owe tax to your state of residence. Some states tax pensions and some do not, so your total tax depends on where you live now.

If you worked in Michigan and earned a pension but now live in another state, Michigan does not tax that pension. You owe tax only to your current state of residence. This is why some retirees move to Michigan — the state's pension exemption means lower taxes if you have a pension from any source.

Military pensions and federal employee pensions

Military pensions are exempt from Michigan income tax. This applies to pensions from active duty, reserve, and National Guard service. You do not report military pension income on your Michigan return.

Federal employee pensions — from the Civil Service Retirement System (CSRS) or the Federal Employees' Retirement System (FERS) — are also exempt from Michigan tax. The same exemption applies whether you worked for the federal government, a state government, or a local government.

If you receive both a military pension and a federal employee pension, both are exempt. There is no limit on the total amount of pension income you can receive tax-free in Michigan.

Frequently Asked Questions

Do I owe Michigan tax on a pension I earned in another state?

No. Michigan does not tax any pension income, regardless of where you earned it or which state or employer paid it. However, the state where you earned the pension may tax it even after you move to Michigan. You would owe tax to that state, not to Michigan.

What if I am under 59½ and withdraw from my 401(k) early?

Michigan taxes the full withdrawal as regular income. You will also owe a 10 percent federal penalty for early withdrawal (with some exceptions). The Michigan tax is separate from the federal penalty and is calculated at Michigan's income tax rate.

Is my spouse's pension exempt if I file jointly?

Yes. Each spouse's pension is exempt individually. If both of you receive pensions, neither is taxed by Michigan. You report both pensions on your joint return and claim exemptions for both.

Do I need to file a Michigan return if my only income is a pension?

No. If your only income is a pension, Social Security, or other income that Michigan does not tax, you have no Michigan income tax filing requirement. However, you may want to file anyway if you had taxes withheld, because you would receive a refund.

What happens to my pension exemption if I move out of Michigan?

The Michigan exemption applies only while you are a Michigan resident. Once you move to another state, you no longer file a Michigan return and the exemption no longer matters. Your new state's tax rules explore instead.