Last Updated: April 2026
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% in 2023 when a constitutional revenue cap provision triggered an automatic rate reduction, and it may fluctuate again in future years based on state revenue thresholds.
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 of 4.05% reflects an automatic reduction triggered in 2023 by a constitutional provision: when Michigan’s General Fund revenues grow faster than the rate of inflation and population growth, the income tax rate automatically adjusts downward. The rate had previously been at 4.25% for many years.
The rate could change again 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.
| State | Income Tax System | Tax at $75,000 | Tax at $150,000 | Tax at $200,000 |
|---|---|---|---|---|
| Michigan | Flat 4.05% | ~$3,038 | ~$6,075 | ~$8,100 |
| Ohio | Progressive 0–3.5% | ~$1,346 | ~$3,646 | ~$5,396 |
| Indiana | Flat 3.05% | ~$2,288 | ~$4,575 | ~$6,100 |
| Illinois | Flat 4.95% | ~$3,713 | ~$7,425 | ~$9,900 |
| Wisconsin | Progressive 3.5–7.65% | ~$3,900 | ~$9,500 | ~$13,600 |
Michigan’s flat rate is higher than Ohio’s progressive rate at moderate incomes but lower than Illinois and far below Wisconsin’s top bracket. Note that Ohio’s effective burden is much higher once municipal income taxes and SDIT are included.
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 entirely on your birth year and were significantly modified by the “Lowering MI Costs” legislation signed in 2023, which phases in expanded exemptions through 2026.
If you were born before January 1, 1946, most retirement income is exempt from Michigan income tax. This includes:
If you were born between 1946 and 1952, you receive a pension subtraction from income of:
This subtraction applies to pension and retirement income in aggregate. Income above these thresholds is taxable at 4.05%. Social Security remains fully exempt regardless.
Taxpayers born after 1952 have historically had the most limited retirement income exemptions. However, under the Lowering MI Costs Act, this tier is being expanded in a four-year phase-in from 2023 through 2026:
By 2026, Tier 3 taxpayers will have the same exemption amounts as Tier 2. Military retirement pay has been fully exempt from Michigan income tax since 2016 regardless of birth year.
| Scenario | Michigan Tax (2026) | Ohio Tax | Indiana Tax |
|---|---|---|---|
| Retiree, born 1940, $60K pension | ~$0 (Tier 1 fully exempt) | ~$0 (SS exempt, OPERS partial) | ~$1,830 |
| Retiree, born 1950, $80K pension | ~$1,620 (after $40K joint deduction) | ~$1,100 (approx) | ~$2,440 |
| Retiree, born 1960, $80K pension | ~$1,620 (after $40K joint deduction, 2026) | ~$1,100 (approx) | ~$2,440 |
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 4.05% state tax and 2.4% city tax, for a combined 6.45% 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.
Michigan’s effective property tax rate averages approximately 1.54%. 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. Eligible taxpayers with household income below $63,000 (2024 threshold; indexed annually) can claim a credit equal to a percentage of property taxes that exceed 3.5% of household income. 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 2024 federal exemption of $13.61 million per individual. 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 | 4.05% vs 4.95% flat rate | Michigan saves ~$4,500/year at $500K income |
| Moderate-income earner vs Ohio | Ohio effectively lower once city/SDIT excluded | Ohio’s layered system complicates comparison |
| Homeowner long-term | Proposal A caps assessment growth | Benefit accumulates over time |
At face value, Ohio’s top state income tax rate of 3.5% appears lower than Michigan’s 4.05%. However, Ohio residents in Columbus or Cleveland add 2.5% municipal income tax plus potentially 1–2% SDIT, bringing their combined Ohio income tax burden to 6–8%. Michigan residents outside Detroit pay only the 4.05% state rate, making Michigan’s effective total burden competitive with or lower than Ohio’s for many residents.
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Talk to a Michigan CPA About Your Taxes →Michigan has a flat income tax rate of 4.05% on all taxable income for 2026. This rate was reduced from 4.25% in 2023 when a constitutional revenue cap provision triggered an automatic reduction. The rate applies to wages, self-employment income, capital gains, and most other income. There are no brackets — everyone pays the same 4.05% flat rate on taxable income regardless of how much they earn.
Michigan’s retirement income treatment depends on your birth year. If you were born before 1946 (Tier 1), most pension and retirement income is exempt. If born 1946–1952 (Tier 2), you can deduct $20,000 single or $40,000 joint from pension income. If born after 1952 (Tier 3), the Lowering MI Costs legislation phases in the same $20,000/$40,000 deduction by 2026 (reaching full implementation that year). Social Security is fully exempt from Michigan income tax regardless of birth year. Military retirement pay is fully exempt regardless of birth year.
Detroit levies a city income tax of 2.4% on Detroit residents and 1.2% on non-residents who work in Detroit. This is in addition to Michigan’s state income tax, bringing the combined state-plus-city rate to 6.45% for Detroit residents. Other Michigan cities also have city income taxes: Grand Rapids charges 1.5% for residents and 0.75% for non-residents. City income taxes are filed separately from Michigan state income tax.
Proposal A is a 1994 Michigan constitutional amendment that caps the annual increase in a property’s taxable value at the lesser of 5% or the rate of inflation (CPI). This means long-term homeowners can accumulate significant protection from rising property taxes even as home values increase. However, when a property is sold, the taxable value “uncaps” and resets to the state equalized value (50% of market value), which can cause a large property tax increase for the buyer compared to what the seller was paying.
Yes — Michigan has a 6% sales tax that is uniform across the entire state. Unlike many states, Michigan has no local or county sales tax additions. You pay the same 6% whether you’re shopping in Detroit, Grand Rapids, Traverse City, or anywhere else in Michigan. Groceries and prescription drugs are exempt. Prepared food (restaurants) is taxable at 6%. This uniform rate makes Michigan’s sales tax among the simplest to understand in the country.
No — Michigan has no state estate tax and no inheritance tax. Michigan residents are subject only to the federal estate tax, which has a 2024 exemption of $13.61 million per individual. For comparison, neighboring Illinois has an estate tax starting at $4 million at rates up to 16%, and Pennsylvania has an inheritance tax on most beneficiaries. Michigan’s lack of any death tax is an advantage for estate planning.
Michigan’s flat 4.05% state income tax appears higher than Ohio’s top 3.5% state rate at first glance. However, Ohio residents in most cities also pay municipal income tax (Columbus and Cleveland: 2.5%) plus potentially a School District Income Tax of 0.5–2%. Adding these layers, many Ohio residents in major cities pay 6–8% combined income tax, making Michigan’s 4.05% (or 6.45% in Detroit) competitive. Michigan’s 6% flat sales tax is higher than Ohio’s base 5.75%, but Michigan has no local sales tax additions while Ohio counties add up to 2.25%.