2023 Tier III

In 2023, The Lowering MI Costs Plan amended MCL 206.30, which provides taxpayers with more options to choose the best taxing situation for their retirement benefits beginning tax year 2023.

Although subject to a temporary 4-year phase-in period beginning tax year 2023, this new law essentially restores the pre-2012 retirement and pension benefits subtraction for most taxpayers in Michigan beginning in 2026. This law change will ultimately benefit most retirees in Michigan while ensuring that previous benefits for taxpayers in unique circumstances remain unchanged. 

The law change took effect on February 13, 2024. Treasury is committed to ensuring that all eligible retirees can take full advantage of the expanded subtraction options. Therefore, beginning with Michigan’s 2023 tax return, forms, and instructions (e-file and paper format), all retirement and pension benefit subtraction options will be incorporated - including those created in the new law.

1. Use the 1099-R distribution chart to determine whether your distribution qualifies for a retirement and/or pension benefits subtraction.
2. Determine if you are following the specific rules of the retirement plan. For a retirement distribution to qualify for a retirement/pension subtraction the taxpayer must retire under the specific rules of the retirement plan. Learn more about qualified distribution requirements depending upon your plan.
3. Compare options 1 and 2 to determine which subtraction option is most advantageous for you.

If you do not qualify based on the distribution chart in step one, then you do not have a qualified subtraction and options one and two are not applicable.

MCL 206.30(9) outlines limitations to the retirement subtraction. If the retiree receives a qualified pension distribution per step 1, the allowable pension subtraction is calculated based on date of birth of the taxpayer (for single/married filing separate returns) or the oldest spouse (for married filing a joint return).

After reaching age 67, individuals are entitled to subtract the Michigan Standard Deduction against all income. This deduction is reduced by:

• the personal exemption amount.
• taxable Social Security benefits included in AGI, claimed on the Schedule 1, and
• amounts claimed on Schedule 1 for military pay
• amounts claimed on Schedule 1 for retirement or pension benefits from the U.S. Armed Forces, Michigan National Guard, and Railroad Retirement Act

To determine Tier 3 Michigan Standard Deduction on Schedule 1, complete Worksheet 2 in the MI-1040 booklet. Taxpayers that claim a Michigan Standard Deduction should not file Form 4884.

SSA Exempt Retiree Details

SSA exempt employment means the taxpayer receives retirement benefits from employment with a governmental agency that was not covered by the federal Social Security Administration. This means the worker did not pay Social Security taxes and is not eligible for Social Security benefits based on that employment.

Almost all employment is covered by the federal SSA. The most common instances of retirement and pension benefits from employment not covered by Social Security are:

• police and firefighter retirees
• some federal retirees covered under the Civil Service Retirement System and hired prior to 1984, and
• a small number of other state and local government retirees.

Tier 3 recipients, who were not covered by the federal SSA, and were retired as of January 1, 2013 are entitled to:

• an additional $15,000 per qualifying spouse for the Michigan Standard Deduction if the recipient has reached the age of 67 between January 1, 1953 and January 1, 1957 and retired as of January 1, 2013.
• an additional $15,000 increase to a retirement subtraction, per qualifying spouse, if born after January 1, 1957 (see section B of Form 4884)

Tier 3 recipients, who were not covered by the federal SSA and were not retired by January 1, 2013 are entitled to:

• a retirement or pension subtraction of $15,000 per qualifying spouse if recipient has reached the age of 62 (born after January 1, 1957 but before January 2, 1962) but has not yet reached the age of 67.

Qualifying Surviving Spouse Details

The subtraction amount is based on a phase-in of the private pension limits, which are adjusted annually based on the United States Consumer Price Index. For 2023 those amounts are

• $15,380 if single or married filing separately
• $30,759 if married filing jointly

The maximum retirement subtractions under the Phase-In Method apply to the combined total of both private and public benefits and are available to retirees based on their year of birth, beginning with 1946. The eligible birth years expand each year until 2026, when everyone born after 1945 will be eligible for a subtraction of qualified retirement benefits included in adjusted gross income.

The election options for a Surviving Spouse also apply to the phase-in subtraction.

2023 Forms

2023 Pension Estimator

2023 Example Scenarios

2023 Dividend, Interest, and Capital Gain Deduction Estimator

Revenue Administrative Bulletin 2023-22