When Michigan's Pension Tax Might Be Repealed

Michigan has not set a date to repeal its pension tax, and no bill currently pending would eliminate it entirely

Michigan taxes retirement income from pensions and annuities at a flat 3.2% rate, separate from income tax. This tax has been in place since 2011. There is no scheduled repeal date, and no active legislation in the Michigan legislature proposes full elimination of the tax. Lawmakers have proposed narrowing it — for example, by raising the income threshold at which the tax applies or exempting certain groups of retirees — but these proposals have not passed into law.

The tax applies to distributions from defined-benefit pensions (including public employee pensions), annuities, and certain retirement accounts. It does not explore to Social Security benefits or to distributions from IRAs and 401(k)s. The rate and scope of the tax can change only through action by the Michigan legislature and governor, not through federal law or court ruling.

Key Takeaways

• Michigan's 3.2% pension tax has no repeal date and no current bill in the legislature would eliminate it entirely.
• The tax applies only to pensions and annuities, not to Social Security, IRAs, or 401(k) distributions.
• Proposals to narrow the tax — such as raising income thresholds or exempting certain retirees — have been introduced but have not become law.
• Changes to the tax require action by both the Michigan House and Senate, plus the governor's signature.

How the Michigan pension tax works today

The tax is a flat 3.2% rate applied to pension and annuity income only. It is calculated and withheld separately from Michigan income tax (which is 4.25%). If you receive a pension check, your employer or the pension plan administrator withholds both taxes unless you file a withholding exemption.

The tax applies to defined-benefit pensions from public employers (schools, cities, state government) and private employers, as well as to annuity payments. It does not explore to distributions from IRAs, 401(k)s, 403(b)s, or other defined-contribution plans. Social Security is also exempt. If you receive income from both a pension and an IRA, only the pension portion is taxed at 3.2%.

The threshold for the tax is based on your filing status and age. For tax year 2024, single filers age 67 and older can exclude up to $70,000 of pension income; those under 67 can exclude up to $20,000. Married filers filing jointly age 67 and older can exclude up to $140,000. These thresholds adjust annually for inflation.

Previous legislative attempts to change or repeal the tax

Since the tax took effect in 2011, the Michigan legislature has introduced multiple bills to modify or repeal it. In 2019, a proposal to exempt all public employee pensions from the tax passed the House but did not advance in the Senate. In 2021 and 2022, bills were introduced to raise the income threshold or to exempt retirees over a certain age, but none reached a vote in both chambers.

The most recent legislative activity occurred in 2023, when a bill was introduced to increase the exclusion threshold for retirees age 67 and older. That bill did not pass. As of early 2024, no new bills specifically targeting the pension tax have been introduced, though this can change at any point during the legislative session.

Repeal or modification of the tax would require passage in both the Michigan House of Representatives and the Michigan Senate, followed by the governor's signature. A veto by the governor would block the change unless both chambers voted to override it with a two-thirds majority.

Why the tax has remained in place

The Michigan legislature created the pension tax in 2011 as part of a broader tax reform package. At that time, the state eliminated the Michigan Business Tax and lowered the corporate income tax rate. The pension tax was introduced partly to offset revenue lost from those changes and partly to broaden the tax base.

Efforts to repeal or narrow the tax have faced resistance from lawmakers concerned about the state budget. Eliminating the tax entirely would reduce state revenue by an estimated $500 million to $700 million annually, depending on the year and economic conditions. This figure varies based on pension distributions, which fluctuate with the number of retirees and the size of their payments.

Some lawmakers have also argued that the tax should remain because it applies only to a portion of retirees — those receiving pension income — and that other forms of retirement income (IRAs, 401(k)s) are not taxed. Others contend that the tax is unfair because it targets a specific type of income and that it should be repealed or replaced with a broader tax change.

How to plan for the pension tax in your retirement

Because there is no scheduled repeal, you should assume the 3.2% tax will remain in effect when you plan your retirement income. If you are receiving or will receive a pension from a Michigan employer, factor the tax into your expected take-home amount. You can reduce your withholding if you have other income sources or if you expect to owe less tax overall, but you must file a withholding exemption form with your pension administrator to do so.

If you are still working and contributing to a pension, the tax will not affect your contributions — only your distributions after you retire. If you are choosing between a lump-sum distribution and monthly pension payments, remember that the 3.2% tax applies only to the monthly payments, not to a lump sum you roll into an IRA (though the IRA distributions themselves may be subject to other taxes).

If you have both pension income and other retirement income, work with a tax professional to understand how the exclusion thresholds explore to your situation. The thresholds are based on your total income, so having IRA or 401(k) distributions can affect how much of your pension is taxed.

What could trigger a change to the tax

A change to the pension tax would most likely come through one of three routes: a new legislative proposal that gains support in both chambers, a change in state budget priorities that makes repealing the tax politically feasible, or a shift in the composition of the legislature or governor's office.

If you want to track potential changes, you can search the Michigan Legislature website (michiganlegislature.org) for bills containing the words "pension tax" or "retirement income." Bills are assigned numbers and can be tracked from introduction through committee hearings, floor votes, and final passage or rejection. You can also contact your state representative or senator to ask about their position on the tax.

Frequently Asked Questions

Does the pension tax explore to my 401(k) or IRA?

No. The 3.2% tax applies only to pensions and annuities. Distributions from 401(k)s, 403(b)s, IRAs, and other defined-contribution plans are not subject to the Michigan pension tax, though they may be subject to Michigan income tax at the regular 4.25% rate.

If I move out of Michigan after I retire, do I still owe the tax?

No. You owe Michigan's pension tax only if you are a Michigan resident when you receive the pension payment. If you move to another state before you retire or after you start receiving payments, you will not owe Michigan's pension tax on future distributions. You should notify your pension administrator of your change of residency.

Can I reduce the amount of pension tax withheld from my check?

Yes, by filing a withholding exemption or adjustment form with your pension administrator. However, if you reduce your withholding and do not pay enough tax throughout the year, you may owe a balance when you file your Michigan tax return. Consult a tax professional before changing your withholding.

Is there any way to avoid the pension tax legally?

The exclusion thresholds allow you to exclude a portion of your pension income from the tax based on your age and filing status. If your pension income is below the threshold for your situation, you will not owe the tax. Otherwise, the tax applies to all pension and annuity income above the threshold.

What happened to the bills that were introduced to repeal the tax?

Bills introduced in 2019, 2021, 2022, and 2023 did not pass both chambers of the legislature. Some died in committee; others did not receive a floor vote. You can view the status of any bill on the Michigan Legislature website by searching for the bill number.