If you are retired or planning for retirement, you may have heard about changes to Michigan tax laws and wondered how they impact your IRA withdrawals. Here is a clear, practical overview of what is changing and why it matters for your planning.
Article Contents
The Big Picture
Michigan recently updated how it calculates taxable income at the state level. These changes do not affect how IRA distributions are taxed federally, but they do affect how much retirement income you can exclude on your Michigan return.
In simple terms, Michigan is phasing in larger retirement income deductions for all retirees. As this phase-in completes, many retirees may see significantly lower or even no Michigan income tax on IRA withdrawals. Social Security benefits remain fully exempt from Michigan income tax and are not impacted by these changes.
What Counts as Retirement Income?
For Michigan tax purposes, retirement income generally includes:
Traditional IRA distributions
Pension income
Certain annuity payments
How the Phase-in Works
Michigan allows retirement and pension deductions up to an annual dollar cap. The percentage of that cap you can use depends on the tax year:
| Tax Year | Percentage of Deduction Allowed |
|---|---|
| 2025 | 75% of the full allowable deduction |
| 2026 and later | 100% (full deduction) |
By 2026, retirees will be able to use the full deduction each year.
How This Works in Practice:
Consider a client who files as single, was born in 1958, and takes $40,000 in annual distributions from a traditional IRA. The 2026 Michigan retirement income deduction cap for single filers is $64,040 and $128,080 for joint filers.
| 2025 Tax Year | 2026 Tax Year | |
|---|---|---|
| Deduction allowed | 75% of cap | 100% of cap |
| Calculation | $64,040 × 75% | $64,040 × 100% |
| Allowed Michigan deduction | $48,030 | $64,040 |
| IRA distribution | $40,000 | $40,000 |
| Federal tax | $40,000 taxable | $40,000 taxable |
| Michigan taxable | $0 | $0 |
In both years, the full IRA distribution is taxable federally, but no Michigan income tax is owed because the withdrawal is below the allowed deduction.
What if the withdrawal were higher for this client in 2026?
| 2026 Tax Year Higher Withdrawal Example | |
|---|---|
| IRA distribution | $70,000 |
| Allowed Michigan deduction | $64,040 |
| Michigan taxable | ($70,000 - $64,040) = $5,960 |
Only the $5,960 portion above the deduction cap is subject to Michigan income tax.
Why This Matters
These changes may create meaningful opportunities for thoughtful retirement income planning, especially when it comes to:
Coordinating IRA distributions over multiple years
Evaluating the timing of Roth conversions
Managing taxable income before required minimum distributions begin
As the phase-in completes in 2026, many retirees will have more flexibility in how they draw from retirement accounts while keeping their state taxes low.
Bottom line
Michigan’s updated tax rules do not change how IRA distributions are taxed federally, but they expand how much retirement income you can exclude at the state level. For many retirees, this can mean lower Michigan taxes and greater flexibility in retirement income planning.
If you would like help understanding how these rules apply to your specific situation or how to coordinate withdrawals with a broader tax strategy, a personalized review can ensure you are taking full advantage of these benefits. Contact Pearl Planning today get started!
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