Michigan’s tax structure is deceptively simple on the surface — a single flat income tax rate applying to all residents — but contains important layers of complexity, particularly for retirees. The state income tax rate dropped from 4.25% to 4.05% for tax year 2023 only, when a constitutional revenue cap provision triggered a one-time automatic rate reduction; it reverted to 4.25% for 2024 onward and Michigan's Treasury has reconfirmed 4.25% for 2026, since General Fund growth has not since exceeded inflation.
For retirees, Michigan’s treatment of pension and retirement income is among the most complex in the Midwest, with a three-tier exemption system based on the taxpayer’s birth year. The “Lowering MI Costs” legislation passed in 2023 further expanded retirement income exemptions in a phase-in that runs through 2026. This guide covers all of this, plus Detroit’s unique city income tax, Michigan’s Homestead Property Tax Credit, uniform 6% sales tax, and how Michigan compares to neighboring states.
Michigan has used a flat income tax since 1967. The current rate is 4.25%. A constitutional provision allows for automatic rate reductions when Michigan’s General Fund revenues grow faster than the rate of inflation and population growth — this triggered a one-time reduction to 4.05% for tax year 2023 only. Michigan’s Treasury confirmed the reduction did not carry forward, and the rate reverted to 4.25% for tax year 2024 onward; Treasury reconfirmed 4.25% again for 2026 after determining General Fund growth had not exceeded inflation.
The rate could still change in future years depending on state revenue levels. This is unusual in that Michigan’s income tax rate is not purely set by the legislature — it has an automatic adjustment mechanism that can lower (but not raise) the rate, though any such reduction applies for a single tax year unless renewed by subsequent revenue growth.
| State | Income Tax System | Tax at $75,000 | Tax at $150,000 | Tax at $200,000 |
|---|---|---|---|---|
| Michigan | Flat 4.25% | ~$2,937 | ~$6,124 | ~$8,249 |
| Ohio | 2.75% above a $26,050 zero bracket plus $332 base (2026, HB96) | ~$1,619 | ~$3,688 | ~$5,063 |
| Indiana | Flat 2.95% | ~$2,183 | ~$4,396 | ~$5,871 |
| Illinois | Flat 4.95% | ~$3,568 | ~$7,280 | ~$9,755 |
| Wisconsin | Progressive 3.5–7.65% | ~$2,944 | ~$7,309 | ~$9,959 |
Michigan’s flat rate is higher than Ohio’s flat rate at every income level but lower than Illinois and below Wisconsin’s effective burden at these income levels. Note that Ohio’s effective burden rises once municipal income taxes are included — for residents of higher-municipal-rate cities like Columbus or Cleveland (2.5%), the combined state-plus-city burden can exceed Michigan’s flat 4.25%; only lower-municipal-rate cities like Cincinnati (1.8%) reliably stay below Michigan’s level.
Social Security benefits are fully exempt from Michigan income tax. This exemption applies at all income levels, unlike some states that phase it out at higher incomes.
Michigan's treatment of retirement income is among the most complex in the country. The rules depend on your birth year and were significantly modified by the “Lowering MI Costs” legislation (Public Act 4 of 2023), which phases in a larger retirement and pension subtraction through 2026. Treasury says the change essentially restores the pre-2012 subtraction from 2026. Retirees may choose the most favorable calculation method each year.
If you were born before January 1, 1946, most retirement income is exempt from Michigan income tax. This includes:
After reaching age 67, you can elect the Tier 2 Michigan standard deduction against all income:
Some retirees with government pensions from employment not covered by Social Security may be entitled to a larger deduction. Social Security remains fully exempt regardless of birth year.
Under the Lowering MI Costs legislation, retirees born after 1945 may instead elect a phase-in subtraction that is a percentage of the private-pension limit, applied to the combined total of qualifying public and private retirement benefits:
The Tier 2 standard deduction cannot be combined with the phase-in subtraction; you elect one or the other each year. Military retirement pay is exempt from Michigan income tax regardless of birth year.
A married couple filing jointly with $80,000 of qualifying pension income and no other income would, under the 2026 phase-in (up to 100% of a private-pension limit that was $131,794 for joint filers in 2025), generally be able to subtract all of it, so Michigan would tax none of it. A retiree born before 1946 with a $60,000 pension is similarly covered by the Tier 1 limit. Confirm eligibility and the current-year limits with Michigan Treasury's retirement and pension estimator, since qualifying distributions and age requirements apply.
Detroit levies its own city income tax under Michigan’s Uniform City Income Tax Ordinance. The rates are:
Detroit’s city income tax is in addition to Michigan’s state income tax. A Detroit resident earning $100,000 pays both 4.25% state tax and 2.4% city tax, for a combined 6.65% Michigan tax burden before federal taxes.
Other Michigan cities with income taxes include:
Michigan city income taxes are a separate filing from state income tax. You file a city income tax return for each Michigan city where you live or work.
One of the most important features of Michigan property tax is Proposal A, passed by Michigan voters in 1994. Proposal A limits the annual increase in a property’s taxable value to the lesser of 5% or the rate of inflation (CPI). This means long-term Michigan homeowners can see their taxable value diverge significantly from market value, potentially resulting in much lower tax bills than newer buyers.
However, when a property is sold, the taxable value “uncaps” and resets to the state equalized value (SEV), which is 50% of assessed market value. This can result in a substantial property tax increase for the new buyer compared to what the previous owner was paying.
Michigan offers a Homestead Property Tax Credit for lower-income homeowners and renters. For 2025, Treasury lists a total household resources limit of $71,500 (phase-out begins above $62,500) and a maximum credit of $1,900 (limits are indexed annually). The credit is based on the amount by which property taxes exceed a share of household resources. Renters can claim 23% of rent paid as a proxy for property taxes.
Michigan has a 6% state sales tax with no local additions. This is one of the simplest sales tax structures in the country — the rate is identical throughout Michigan regardless of city or county. Groceries (food for home consumption) are exempt. Prescription drugs are exempt. Prepared food (restaurants) is taxable at 6%.
Michigan has no state estate tax and no inheritance tax. Michigan residents are subject only to the federal estate tax, with the 2026 federal exemption of $15 million per individual (OBBBA — raised from $13.99M and made permanent). This makes Michigan straightforward for estate planning compared to states like Illinois, which imposes a state estate tax on estates above $4 million at rates up to 16%.
| Profile | Michigan Advantage | Consideration |
|---|---|---|
| Pre-1946 retiree with large pension | Pension income largely exempt | Tier 1 is highly favorable |
| Military retiree | Military pension fully exempt at any age | Strong for military families |
| High-income earner vs Illinois | 4.25% vs 4.95% flat rate | Michigan saves ~$3,750/year at $500K income |
| Moderate-income earner vs Ohio | Ohio's state rate is lower; city and school-district income taxes add to it | Ohio’s layered system complicates comparison |
| Homeowner long-term | Proposal A caps assessment growth | Benefit accumulates over time |
Ohio’s flat state income tax rate of 2.75% (2026, per House Bill 96) is now well below Michigan’s 4.25%. However, Ohio residents in Columbus or Cleveland also pay a 2.5% municipal income tax, and many pay a school-district income tax, so combined state-plus-local income tax can approach or exceed Michigan's 4.25% depending on the city and school district. Michigan residents outside the cities that levy an income tax pay only the 4.25% state rate.
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Michigan’s complex three-tier retirement income rules and Detroit city income tax require expert guidance — TaxHub connects you with licensed CPAs who specialize in Michigan’s unique tax landscape.
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