Michigan's flat income tax rate is 4.25 percent on most wages and salaries

Michigan taxes income at a single rate of 4.25 percent, applied to wages, salaries, business income, and most other sources of income. This is a flat tax, meaning everyone pays the same percentage regardless of how much they earn — there are no tax brackets that increase with income the way federal taxes do.

The 4.25 percent rate has been in place since 2012. Before that, Michigan's income tax was 4.35 percent, and it was lowered as part of a broader tax restructuring. This rate applies to Michigan residents and nonresidents who earn income within the state.

Michigan also taxes certain types of income differently. Long-term capital gains — profits from selling stocks, real estate, or other investments you held for more than a year — are taxed at 50 percent of the normal rate, which works out to about 2.125 percent. This preferential treatment for long-term capital gains is separate from the standard 4.25 percent rate on wages.

Key Takeaways

  • Michigan's income tax rate is 4.25 percent on wages and most other income, with no variation based on how much you earn.
  • Long-term capital gains are taxed at half the standard rate, approximately 2.125 percent.
  • The state taxes both residents and nonresidents who work in Michigan, though residents may owe tax on out-of-state income as well.
  • Michigan has no local income taxes, so the state rate is the only income tax you owe to Michigan — federal income tax is separate.
  • Certain types of income, including Social Security benefits and some retirement distributions, are exempt from Michigan income tax.

What income is subject to the 4.25 percent rate

The 4.25 percent rate applies to W-2 wages from an employer, self-employment income, interest and dividends, rental income, and most other forms of earned or unearned income. If you receive a paycheck from a Michigan employer, your employer withholds Michigan income tax at this rate from each check.

If you are self-employed or have income that is not subject to withholding, you may owe Michigan estimated tax payments throughout the year. These are quarterly payments made directly to the state, similar to federal estimated taxes.

Some income is excluded entirely. Social Security benefits are not taxed by Michigan, even though they are taxed federally. Certain retirement distributions, including distributions from a Roth IRA, are also exempt. Military pay for active-duty service members is exempt as well.

How Michigan taxes nonresidents and part-year residents

If you do not live in Michigan but work there, you owe Michigan income tax on the wages you earn within the state at the same 4.25 percent rate. Your Michigan employer will withhold this tax from your paycheck just as they would for a resident.

If you moved to or from Michigan during the year, you are a part-year resident. You owe Michigan tax only on income earned while you were a Michigan resident. The state requires you to report the dates you became a resident and the dates you left, and to calculate your tax liability based only on the portion of the year you lived there.

Some states have reciprocal tax agreements with Michigan, meaning residents of those states who work in Michigan may not owe Michigan income tax. However, Michigan currently has no reciprocal agreements in place, so nonresidents working in Michigan are taxed the same as residents.

The difference between state and federal income tax

Michigan income tax and federal income tax are separate obligations. The 4.25 percent you owe to Michigan is in addition to federal income tax, which is calculated on a different system with different rates and brackets. Your federal tax depends on your total income and filing status, while your Michigan tax is straightforward 4.25 percent of Michigan-source income.

When you file your federal return, you report your total income. When you file your Michigan return, you report only the income subject to Michigan tax. Some deductions allowed on your federal return may not be allowed on your Michigan return, and vice versa, so the two returns are calculated independently.

Your employer withholds both federal and Michigan tax from your paycheck. The federal withholding is based on the W-4 form you complete, while Michigan withholding is based on the state's standard rate unless you request additional withholding or claim exemptions on a Michigan withholding form.

Capital gains and investment income

Long-term capital gains receive preferential treatment under Michigan law. If you hold an investment for more than one year and then sell it at a profit, only 50 percent of that gain is subject to Michigan income tax. This means the effective tax rate on long-term capital gains is approximately 2.125 percent.

Short-term capital gains — profits from investments held for one year or less — are taxed at the full 4.25 percent rate, the same as ordinary income. Dividends and interest from investments are also taxed at the full rate unless they may have access to for a specific exemption.

This preferential rate applies only to capital gains. Other investment income, such as rental income or business income from an investment property, is taxed at the standard 4.25 percent rate.

How to understand your Michigan tax withholding

Your Michigan employer withholds income tax from your paycheck based on the state's 4.25 percent rate. The amount withheld is calculated on your gross wages, though certain deductions and exemptions may reduce the taxable amount. If you have multiple jobs or other sources of income, your total withholding across all jobs may not be enough to cover your full tax liability.

You can adjust your withholding by completing a Michigan withholding form (Form MI-W4) and submitting it to your employer. This form allows you to claim exemptions, request additional withholding, or adjust the amount withheld if you expect to owe more or less tax than the standard calculation produces.

When you file your Michigan tax return at the end of the year, you compare the total tax you owe to the total amount withheld. If too much was withheld, you receive a refund. If too little was withheld, you owe the difference. Self-employed individuals and those with nonwage income should make estimated tax payments to avoid owing a large amount at tax time.

Special situations and exemptions

Certain groups of people are exempt from Michigan income tax or have special rules. Military members on active duty do not owe Michigan tax on their military pay, even if they are stationed in Michigan. Clergy members may be able to exclude housing allowances from taxable income under federal rules, which also applies to Michigan tax.

Retirement income has mixed treatment. Distributions from a traditional IRA or 401(k) are taxed as ordinary income at 4.25 percent. However, distributions from a Roth IRA are not taxed. Pension income from a public employee retirement system may also receive special treatment depending on when you retired and the type of pension.

If you are a Michigan resident but earn income outside Michigan, you still owe Michigan tax on that income. However, if you paid income tax to another state on that out-of-state income, Michigan allows a credit for taxes paid to other states, so you do not pay tax twice on the same income.

Frequently Asked Questions

Does Michigan have local income taxes in addition to the state rate?

No. Michigan has no local income taxes. The 4.25 percent state rate is the only income tax owed to Michigan. Some cities and counties have other taxes, such as property taxes or sales taxes, but not income taxes.

What is the difference between the 4.25 percent rate and the capital gains rate?

The standard rate of 4.25 percent applies to wages and most income. Long-term capital gains — profits from investments held more than one year — are taxed at half that rate, about 2.125 percent. Short-term gains and other investment income are taxed at the full 4.25 percent.

If I move out of Michigan, do I still owe tax on income I earned while I lived there?

Yes. You owe Michigan tax on all income earned while you were a Michigan resident, even if you move away later. As a part-year resident, you owe tax only on income earned during the months you lived in Michigan.

Can I claim a credit if I paid income tax to another state?

Yes. Michigan allows a credit for income taxes paid to other states on income that is also subject to Michigan tax. This prevents you from paying tax twice on the same income, though the credit is limited to the Michigan tax owed on that income.

Are Social Security benefits taxed in Michigan?

No. Michigan does not tax Social Security benefits. However, the federal government may tax a portion of your benefits depending on your total income, so you may still owe federal tax on them even though Michigan does not.