No Tax on Overtime Michigan 2026: How Michigan Conforms to the Federal Deduction

No Tax on Overtime in Michigan 2026: Federal Deduction Plus Michigan Conformity

Michigan workers — particularly the many workers employed in the state's manufacturing and auto industries — stand to benefit from a rare double advantage under the One Big Beautiful Bill Act (OBBBA, P.L. 119-21) for tax years 2025–2028. The OBBBA created a federal income tax deduction of up to $12,500 (single) or $25,000 (married filing jointly) for the qualifying overtime premium (claimed on Schedule 1-A; it reduces taxable income, not AGI), and Michigan's 2025 PA 24 added a matching state deduction for tax years 2026 through 2028.

Here is why: Michigan computes its state income tax starting from federal adjusted gross income (AGI) under the Michigan Income Tax Act (MCL §206.30), then applies its flat 4.25% rate (MCL §206.51). The federal overtime deduction is claimed on Schedule 1-A below AGI, so it is not in the AGI Michigan imports and does not flow through on its own. Instead, 2025 PA 24 amended the Michigan Income Tax Act to allow a deduction — for tax years beginning after December 31, 2025 and before January 1, 2029 — equal to the qualified overtime compensation deducted on the federal return. Michigan Treasury says the state deduction should generally mirror the federal one, and it is not available for tax year 2025.

This contrasts with New York, California, and Illinois, which have no comparable state deduction (California's Franchise Tax Board reports that it has not conformed; New York's 2025 IT-201 instructions and Illinois's FY 2026-15 'What's New' bulletin list none), so workers there receive only the federal benefit. Michigan workers get both layers. For a UAW assembly line worker in the Detroit metro earning $66,000 total with $14,000 in overtime pay (of which $4,667 is the OBBBA-qualifying premium — only the 0.5× extra-half-time portion of overtime pay counts, not the full 1.5× rate), combined federal and state tax savings reach approximately $758 per year in the 12% bracket — rising to $3,281 for a higher-overtime worker who reaches the full $12,500 premium cap in the 22% bracket — and the gap versus New York City (no state deduction, higher state and city rates) is approximately $2,734 annually for the $66,000 worker (about $611 outside NYC).

This guide explains exactly how Michigan conformity works, walks through a worked example for an auto industry worker, breaks down what remains taxable (FICA), and explains the 2028 sunset risk.

How Michigan Conformity Works: Its Own Matching Deduction

Michigan's conformity to the OBBBA overtime deduction is not automatic: it exists because the Michigan legislature passed a matching state deduction (2025 PA 24), effective for tax years 2026 through 2028.

Michigan's Tax Calculation Starts at Federal AGI

Under the Michigan Income Tax Act (MCL §206.51), Michigan begins its state income tax calculation using the taxpayer's federal adjusted gross income (AGI) as the starting point, then applies Michigan-specific additions and subtractions before arriving at Michigan taxable income. The flat 4.25% rate is then applied to that Michigan taxable income figure. The federal overtime deduction is claimed on Schedule 1-A below AGI, so it is not part of the AGI Michigan imports.

How the OBBBA Deduction Reaches Michigan

2025 PA 24 amended section 30 of the Michigan Income Tax Act (MCL 206.30) so that, for tax years beginning after December 31, 2025 and before January 1, 2029, Michigan taxable income is reduced by the qualified overtime compensation (IRC section 225) and qualified tips (IRC section 224) deducted on the federal return. Treasury's January 2026 notice says the allowable Michigan deduction should generally mirror the federal deduction, and that nothing is available for tax year 2025. Source: Michigan Treasury notice.

Example of the mechanism:

• Worker earns $66,000 total, including $14,000 in overtime pay — of which $4,667 is the OBBBA-qualifying premium (the 0.5× extra-half-time portion; the other roughly two-thirds of overtime pay is the regular-rate portion and does not qualify for the deduction)
• Federal AGI: $66,000 (the federal deduction is taken below AGI, so AGI is unchanged)
• Michigan deduction (mirrors the federal deduction): $4,667
• Michigan personal exemption (2026): $5,900 (Michigan Treasury 2026 Withholding Guide)
• Michigan taxable income: $66,000 − $4,667 − $5,900 = $55,433
• Michigan income tax on $55,433 at 4.25%: approximately $2,356
• Without the Michigan deduction: ($66,000 − $5,900) × 4.25% = $2,554
• Michigan state saving from the deduction: ~$198 (4.25% × $4,667)

What Michigan Has NOT Done

Michigan has not enacted a permanent overtime income exemption. The Michigan deduction is written for tax years beginning after December 31, 2025 and before January 1, 2029, and it depends on the federal deduction — so Michigan workers lose the state benefit at the same time as the federal one after tax year 2028.

Verify current Michigan Department of Treasury guidance on OBBBA conformity at michigan.gov/treasury before filing, as the Department may issue further instructions on the treatment of the deduction on Michigan Form MI-1040.

Worked Example: Detroit Area Auto Worker Earning $66,000

The following worked example uses a realistic profile for a Michigan manufacturing worker — an assembly line employee at a Detroit-area auto plant, earning a solid hourly wage with significant overtime during model-year changeover periods and production pushes.

Scenario

• Filing status: Single
• Base salary: $52,000/year
• Overtime earnings (total W-2): $14,000 (regular hourly rate ≈$25/hr, ≈373 overtime hours/year; the OBBBA-qualifying FLSA premium component — the 0.5× extra-half-time portion, roughly one-third of overtime pay — is approximately $4,667)
• Total W-2 income: $66,000
• Federal bracket: 12% (2026 brackets — taxable income stays below $50,400 even without the OBBBA deduction)
• Michigan: flat 4.25%, 2026 personal exemption $5,900

Federal Calculation

• OBBBA deduction (qualifying overtime premium — the 0.5× portion of $14,000 in overtime pay): $4,667
• Federal AGI: $66,000 (unchanged; the deduction is taken on Schedule 1-A)
• Standard deduction (2026, single): $16,100 (IRS Rev. Proc. 2025-32)
• Federal taxable income: $66,000 − $16,100 − $4,667 = $45,233
• Federal income tax on $45,233 (10%/12% brackets): approximately $5,180
• FICA on full $66,000 (7.65%): approximately $5,049
• Federal total (income tax + FICA): ~$10,229

Michigan State Calculation

• Starting point: federal AGI = $66,000
• Less Michigan overtime deduction: $4,667; less personal exemption: $5,900
• Michigan taxable income: $55,433
• Michigan income tax: $55,433 × 4.25% = approximately $2,356

Combined Total

• Federal income tax + FICA + Michigan state income tax: ~$12,585 ($5,180 + $5,049 + $2,356)

What If Michigan Had No Matching Deduction?

Without a Michigan deduction (as in New York, California, and Illinois), Michigan's taxable income would be $66,000 − $5,900 = $60,100:

• Michigan income tax on $60,100 × 4.25% = $2,554
• Combined total without the Michigan deduction: ~$12,783
• The Michigan deduction saves ~$198/year on the state return

Federal OBBBA Saving on Its Own

The federal saving comes from: without OBBBA, federal taxable income = $66,000 − $16,100 = $49,900, federal income tax ≈ $5,740. With OBBBA: $5,180. Federal saving: approximately $560 (this worker stays in the 12% bracket under 2026 thresholds, so the saving is 12% × $4,667; a worker whose overtime premium reaches the full $12,500 cap and falls in the 22% bracket would save $2,750 federally on that larger premium).

Combined Annual Savings Summary

• Federal income tax saving (OBBBA deduction): ~$560 (12% bracket on the $4,667 qualifying premium)
• Michigan state income tax saving (via the Michigan deduction): ~$198 (4.25% × $4,667)
• Total combined annual saving: approximately $758

Michigan vs New York: The ~$2,734 Annual Gap

An identical worker in New York — same $66,000 income, same overtime — faces a starkly different outcome. New York has no state deduction for overtime and applies graduated state income tax rates (5.4% at this income level on the 2026 schedule), plus New York City income tax if applicable. A single filer earning $66,000 in New York faces approximately:

• Federal income tax (same OBBBA federal saving): ~$5,180
• FICA: ~$5,049
• New York state income tax on $58,000 of NY taxable income ($66,000 − $8,000 NY standard deduction): ~$2,967
• Total (NY, no NYC): approximately $13,196
• Add NYC income tax ($1,813 + 3.876% × ($58,000 − $50,000)): ~$2,123 at this level: ~$15,319 total

Michigan $12,585 vs New York City ~$15,319 — approximately $2,734 Michigan annual advantage (about $611 versus New York outside NYC) for the same worker doing the same job. Over a five-year period in which overtime remains consistent, the NYC gap approaches $13,671 in cumulative tax difference.

Michigan's Auto and Manufacturing Workers: Who Benefits Most

Michigan's overtime tax advantage is not abstract — it directly benefits the manufacturing and auto workers who form the backbone of the state's economy. These are workers for whom overtime is not occasional but structural: production targets, model-year changeovers, supplier rush orders, and seasonal assembly pushes routinely push weekly hours well above 40.

The Auto Industry: UAW Members and Assembly Line Workers

The United Auto Workers (UAW) represents workers at the Big Three automakers — General Motors, Ford Motor Company, and Stellantis — along with supplier plants and component manufacturers across southeastern Michigan. Assembly line workers at plants in Wayne, Sterling Heights, Dearborn, and Lansing commonly work 10-hour and 12-hour shifts with mandatory overtime during high-demand production runs.

Illustrative arithmetic (the regular rate is assumed for the example, not a wage statistic):

• Annual overtime premium at a $23/hour regular rate with 500 overtime hours: 0.5 × $23 × 500 = $5,750 in qualifying OBBBA premium
• Reaching the $12,500 cap at $23/hour takes about 1,087 overtime hours ($12,500 ÷ $11.50 of premium per hour)

Skilled Trades: Tool and Die Makers, Maintenance Technicians

Michigan has a concentration of skilled trades workers — tool and die makers, CNC machinists, industrial maintenance technicians. Workers with a higher regular rate reach the $12,500 premium cap with fewer overtime hours (about 833 hours at $30/hour, 556 at $45/hour), and those who reach it capture the full $531 Michigan state saving alongside the full $2,750 federal saving (in the 22% bracket).

Tier 2 Suppliers and Stamping Plants

Tier 2 and Tier 3 automotive parts suppliers — stamping plants, plastics molders, glass fabricators, and seating manufacturers — operate throughout western and central Michigan (Grand Rapids, Flint, Lansing, Kalamazoo). These plants often run three shifts with mandatory overtime, and their workers are among the most consistent high-overtime earners in the state. The OBBBA deduction applies equally to these workers as to assembly workers at Tier 1 plants.

Healthcare: Michigan Nurses and EMTs

Michigan hospitals, health systems, and emergency services employ large numbers of workers who regularly exceed 40 hours per week. RNs picking up overtime shifts at Henry Ford Health, Beaumont (Corewell), or Ascension Michigan generate meaningful overtime premium that qualifies for the OBBBA deduction — with Michigan's matching deduction providing up to an additional $531/year state saving compared to states without one.

Annual Benefit Estimates by Worker Type

• Entry-level assembly worker ($47k base wages + $24,000 overtime pay = $8,000 premium at time-and-a-half): Federal saving ~$1,410 (part of the deduction falls in the 12% bracket); Michigan state saving ~$340. Total: ~$1,750/year.
• Mid-career UAW member ($52k base + $37,500 overtime pay = $12,500 premium cap): Federal saving ~$2,750; Michigan state saving ~$531. Total: ~$3,281/year.
• Skilled trades technician ($65k base + $37,500 overtime pay = $12,500 premium): Federal saving ~$2,750 (22% bracket); Michigan state saving ~$531. Total: ~$3,281/year.

Michigan vs Non-Conforming States: New York, California, Illinois

Michigan's conformity to the OBBBA overtime deduction — via its own matching state deduction — places it in a significantly more favorable position than the three most populous states without one. Understanding this comparison helps Michigan workers appreciate what they have, and helps workers in those states understand what they are missing.

New York — No Conformity, Higher State Rates

New York has no state deduction for the federal overtime deduction: New York starts from federal AGI, which the federal deduction does not reduce, so New York workers pay state income tax on 100% of their overtime earnings at New York's graduated rates — 5.4% on taxable income from $13,900 to $80,650 and 5.9% up to $215,400 on the 2026 schedule. New York City residents face an additional NYC income tax of up to 3.876%.

Result: A New York City worker earning $66,000 (same Detroit auto worker scenario) faces roughly $15,319 in combined federal income tax, FICA, state and city taxes versus Michigan's $12,585. Michigan advantage: ~$2,734/year.

California — No Conformity, Highest Marginal Rates

California does not conform to the OBBBA: the California Franchise Tax Board's summary of federal changes shows the state has not adopted the overtime deduction. California workers therefore get only the federal benefit and pay California income tax on their full overtime earnings. Use the USA income tax calculator to compare your own state tax.

Illinois — No Conformity, Flat 4.95%

Illinois has a flat income tax of 4.95%, and the Illinois Department of Revenue's FY 2026-15 'What's New' bulletin lists no subtraction for the federal overtime deduction, so Illinois workers get only the federal benefit. On $12,500 of overtime premium, Illinois workers pay $12,500 × 4.95% = $619 of state income tax with no offset, whereas Michigan's deduction avoids $12,500 × 4.25% = $531 of Michigan tax.

Summary Comparison Table

For a single worker with $12,500 qualifying overtime premium in the 22% federal bracket:

• Michigan: Federal saving $2,750 + state saving $531 = $3,281 total
• New York (outside NYC): Federal saving $2,750 + state saving $0 (no state deduction) = $2,750 total
• California: Federal saving $2,750 + state saving $0 (no state deduction) = $2,750 total
• Illinois: Federal saving $2,750 + state saving $0 (no state deduction) = $2,750 total
• Texas/Florida (no state income tax): Federal saving $2,750; there is no state income tax to reduce, so no state deduction is needed

Among the states compared here, Michigan's matching deduction means workers capture the full combined benefit — making it one of the more advantageous states for overtime earners nationwide.

FICA, Withholding, and What Is Not Exempt

Understanding what the OBBBA overtime deduction does NOT cover is as important as understanding what it does — particularly for Michigan workers whose employers may adjust payroll withholding when the deduction takes effect.

FICA Applies to All Overtime — No Exception

The OBBBA overtime deduction is an income tax deduction only. It has no effect on FICA taxes:

• Social Security tax: 6.2% on all earnings up to the Social Security wage base ($184,500 in 2026)
• Medicare tax: 1.45% on all earnings, with an additional 0.9% above $200,000 (single) — the Additional Medicare Tax
• Total employee FICA: 7.65% on every dollar of overtime pay, without exception

Michigan also does not have any state-level payroll tax on employees (unlike some states with disability insurance funds). FICA is therefore the only payroll deduction that applies to overtime earnings and is unaffected by the OBBBA or Michigan's conformity.

For the Detroit auto worker earning $14,000 in overtime, FICA on the overtime portion: $14,000 × 7.65% = $1,071 — this cost does not change under any tax scenario.

Employer W-4 Withholding Adjustments

The OBBBA deduction is claimed on the annual federal income tax return (Form 1040), not automatically withheld. However, the IRS may issue updated W-4 guidance allowing workers to adjust their withholding to account for the anticipated deduction, reducing over-withholding during the year. Michigan workers who regularly log substantial overtime should consult their employer's payroll department and potentially update their federal W-4 and Michigan withholding certificate (MI W-4) to reflect the expected annual deduction and avoid an overpayment situation at filing.

Michigan-Specific Additions and Subtractions

While Michigan's starting point is federal AGI, the Michigan return (Form MI-1040) includes its own Schedule 1 with Michigan-specific additions and subtractions. Common items include:

• Additions: income not captured in federal AGI but taxable in Michigan (rare for most workers)
• Subtractions: retirement income exclusions, the Michigan overtime and tips deductions (tax years 2026–2028), the Michigan personal exemption ($5,900 per taxpayer and dependent in 2026), and other Michigan deductions

The Michigan personal exemption and the overtime deduction are both applied to the federal AGI imported onto the Michigan return, so they stack rather than replace each other. Michigan workers claiming the personal exemption reduce their Michigan taxable income further beyond the overtime deduction.

Michigan EITC: Additional Benefit for Lower-Income Overtime Workers

Michigan enacted an enhanced state Earned Income Tax Credit in 2023, raising the Michigan EITC from 6% to 30% of the federal EITC. For overtime workers in lower income brackets who also qualify for the federal EITC, the Michigan EITC provides an additional offset against Michigan income tax liability. This benefit can be particularly meaningful for workers whose total income (including overtime) remains in the EITC-eligible range and who have qualifying dependents.

Source: Michigan Department of Treasury

The 2028 Sunset: What Michigan Workers Need to Plan For

The OBBBA overtime deduction is a temporary provision. Under the current legislation, it expires on December 31, 2028 — covering tax years 2025, 2026, 2027, and 2028. Unless Congress passes legislation to extend or make the deduction permanent before that date, the benefit disappears for tax year 2029 and beyond.

The Dual Sunset Risk for Michigan

Because the Michigan deduction is written for tax years 2026 through 2028 only, Michigan workers face a dual sunset in 2028:

1. Federal benefit lost: The OBBBA deduction no longer reduces federal taxable income, so federal taxable income rises — federal income tax increases by the bracket rate on up to $12,500 (single) or $25,000 (MFJ) of formerly deducted overtime premium.
2. State benefit lost simultaneously: Michigan's deduction ends with tax year 2028, so Michigan taxable income rises and Michigan income tax also rises — by up to $531 (single) or $1,063 (MFJ) at the 4.25% rate on the full deduction amount.

In contrast, states like Texas and Florida that have no state income tax retain a permanent structural advantage after 2028 regardless of what Congress does.

Political Probability: Will It Be Extended?

The OBBBA is a flagship Republican legislative priority. Supporters in Congress have argued for making the overtime deduction permanent. However, the provision's sunset was included in the bill's budget scoring to limit its 10-year cost. Whether extension occurs depends on the 2026 and 2028 Congressional elections and the legislative environment. Michigan workers have significant political incentive to engage with their representatives on extension.

Planning Guidance for 2025–2028

• Maximise overtime during the deduction window: For workers with flexibility in their overtime scheduling, the four tax years 2025–2028 represent the most favorable window for overtime tax efficiency in recent history.
• Adjust W-4 and MI W-4 withholding: Avoid over-withholding by updating withholding certificates to reflect the anticipated annual deduction. Consult a tax professional or use the IRS withholding estimator.
• Track qualifying overtime premium separately: Keep records of your FLSA overtime premium component (the 0.5× rate portion) versus the regular rate portion of overtime hours — you will need this for accurate OBBBA deduction calculation at tax time.
• Monitor Michigan Department of Treasury guidance: Michigan Treasury issued a January 2026 taxpayer notice on the state deduction and expects periodic updates from tax year 2026. Watch for MI-1040 instructions at michigan.gov/treasury.