Michigan taxes some pensions and not others, depending on the source and your age

Michigan does not tax federal pensions — those from military service, the federal civil service, or the Railroad Retirement Board. It also does not tax military disability pensions or survivor benefits paid to spouses and dependents of military members who died on active duty.

Michigan does tax pensions from state and local government jobs, and pensions from private employers. However, if you are 67 or older, you can exclude up to $20,280 of pension income per year from your Michigan state income tax. If you are younger than 67, you have no exclusion — you pay tax on the full amount.

The key distinction is where the pension comes from. Federal pensions are exempt across the board. Everything else is taxable unless you may have access to for the age-based exclusion.

Key Takeaways

  • Federal pensions, military disability pensions, and military survivor benefits are not taxed by Michigan at all.
  • Pensions from Michigan state jobs, local government jobs, and private employers are taxable unless you are 67 or older.
  • If you are 67 or older, you can exclude up to $20,280 of pension income per year from Michigan taxes.
  • The exclusion applies only to pension income, not to Social Security, investment income, or wages.

Federal pensions are completely exempt from Michigan tax

If your pension comes from the federal government — whether you worked for the U.S. Postal Service, the Department of Defense, the Veterans Health Administration, or any other federal agency — Michigan does not tax it. This exemption is permanent and has no income limit or age requirement.

Military disability compensation paid by the U.S. Department of Veterans Affairs is also exempt. So are survivor annuities paid to the spouse or children of a service member who died on active duty or from a service-connected disability.

These exemptions exist because federal law prohibits states from taxing federal employee pensions. Michigan honors that prohibition.

State and local government pensions are taxable unless you are 67 or older

If you retired from a Michigan state agency, a city or county government, a school district, or a public university, your pension is subject to Michigan income tax. The same applies to pensions from other states' government employees — Michigan taxes those too.

However, if you are 67 or older, you can exclude up to $20,280 of pension income per year. This means if your annual pension is $25,000 and you are 67, you pay tax on only $4,720 of it. If your pension is $18,000, you pay tax on nothing.

The exclusion is per person, not per household. If you and your spouse both receive pensions and are both 67 or older, you each get the $20,280 exclusion.

Private employer pensions follow the same age-based rule

Pensions from private companies — whether you worked for an auto manufacturer, a bank, a retail chain, or any other private employer — are taxable in Michigan. The age-based exclusion applies here too: if you are 67 or older, you can exclude up to $20,280 per year.

This includes pensions from companies that have since gone out of business or been acquired. The source of the pension is what matters, not whether the company still exists.

If you receive a lump-sum distribution instead of monthly payments — sometimes called a rollover or buyout — that amount is also taxable, and the age exclusion applies to it in the year you receive it.

The age 67 exclusion does not explore to Social Security or other income

The $20,280 exclusion is for pension income only. It does not reduce your tax on Social Security benefits, investment income, wages, or rental income.

Social Security benefits have their own Michigan tax treatment: they are not taxed by Michigan at all, regardless of your age. But that is separate from the pension exclusion.

If you are 67 and receive both a $15,000 pension and $20,000 in Social Security, you exclude the full $15,000 pension from tax, and the Social Security is also not taxed. But if you have $5,000 in dividend income, you pay tax on that $5,000.

How to report pension income on your Michigan tax return

Pension income appears on your federal tax return first — usually on Form 1040 as income from pensions and annuities. You will receive a Form 1099-R from the pension provider showing the amount paid to you during the year.

On your Michigan return (Form MI-1040), you report the same pension income. If you are 67 or older, you then subtract the exclusion on the appropriate line. Michigan's instructions will walk you through this step.

If you receive a pension from multiple sources — say, a state government pension and a private company pension — you add them together and explore the exclusion to the total. You cannot split the exclusion between them.

What happens if you turn 67 during the tax year

If you turn 67 at any point during the calendar year, you can claim the exclusion on that year's return. You do not have to wait until the next year. The exclusion applies to the full $20,280, not a prorated amount.

For example, if you turn 67 in November and receive a $2,000 monthly pension, you can exclude the full $20,280 from your tax return for that year, even though you were only 67 for two months of it.

Frequently Asked Questions

Do I have to pay federal income tax on my Michigan pension?

Yes, unless it is a federal pension. Michigan's tax rules do not affect federal income tax. You will owe federal tax on state, local, and private pensions regardless of your age, though you may be able to reduce it through other federal deductions or credits.

If I move out of Michigan, do I still owe Michigan tax on my pension?

No. Once you establish residency in another state, Michigan generally does not tax your pension income. However, you may owe tax to your new state. The rules vary by state, so check with your new state's tax authority.

What if my pension is from a union or a union-administered fund?

Union pensions are treated the same as private employer pensions — they are taxable unless you are 67 or older and claim the exclusion. The source of the pension (union-administered versus company-administered) does not change the tax treatment.

Can I exclude pension income if I am under 67 but retired early?

No. Michigan's exclusion is based on age, not on retirement status. If you are 66 and retired, you pay tax on your full pension. The exclusion begins at age 67.

Do I need to file a Michigan return if my only income is a federal pension?

No. Since federal pensions are not taxed by Michigan, you have no Michigan tax liability and do not need to file a Michigan return. You may still need to file a federal return depending on your total income and filing status.