Michigan’s 4.25% Flat Tax and 2026 Retirement Exemption

(MICHIGAN) Michigan’s state income tax rules can shape real decisions for immigrants and newcomers: whether to take a job across the state line, how much to set aside from each paycheck, and what “residency” means when you arrive mid-year. For tax year 2025, the headline is stability: Michigan kept its flat 4.25% individual income tax rate, confirmed on May 1, 2025 by State Treasurer Rachael Eubanks, Senate Fiscal Agency Director Kathryn Summers, and House Fiscal Agency Director Mary Ann Cleary after the state’s annual formula review produced no rate cut.

This guide walks through the full filing journey for people who are new to Michigan, work in Michigan but live elsewhere, or plan to retire here. It explains how the Lowering MI Costs Plan changes retirement taxes, how 2025 law changes can affect paychecks and small businesses, and how to file MI-1040 with fewer surprises. According to analysis by VisaVerge.com, these state tax details often become part of a bigger “settling in” checklist for immigrants, alongside housing, banking, and work authorization.

Step 1: Start with your Michigan tax “status” (resident, part-year, nonresident)

Michigan taxes depend on where you live and where you earn income. The flat 4.25% rate is the same, but what counts as “taxable income” can change.

Use these practical buckets (common for immigrants and cross-border workers):

• Full-year resident: You lived in Michigan all year. Michigan generally taxes your income from everywhere at 4.25%.
• Part-year resident: You moved into Michigan during 2025 (or left during 2025). Michigan generally taxes income you received while you were a Michigan resident.
• Nonresident: You lived outside Michigan but earned Michigan-source income (for example, wages from a job in Michigan or rent from Michigan property). Michigan generally taxes only that Michigan-source income at 4.25%.

If you’re unsure how federal rules treat you for tax purposes as a newcomer, the IRS lays out the basic categories (including resident alien rules and common tests) on its official page for tax guidance for aliens and international taxpayers.

Step 2: Know what didn’t change in 2025—and why that matters

Michigan’s flat 4.25% rate applies across income levels and filing statuses. There are no tax brackets to climb, which helps many new residents budget with simple math: taxable income × 4.25%.

The rate was reaffirmed for 2025 after Michigan’s required annual check tied to revenue growth and inflation. For many immigrant households, that predictability matters as much as the rate itself, because rent deposits, car insurance, childcare, and relocation costs often hit all at once.

Step 3: Gather the documents you’ll need before you touch MI-1040

Most problems start with missing paperwork, not bad math. Start a folder (digital or paper) early, especially if you arrived mid-year or worked in more than one state.

Common items used to prepare MI-1040 include:

• Wage statements (W-2) showing Michigan withholding at 4.25%
• 1099 forms for contract work, interest, dividends, or other income
• Retirement distribution records if you’re claiming retirement deductions connected to the Lowering MI Costs Plan
• Records that support residency dates if you’re a part-year filer (lease start date, move-in documents, or other clear proof)
• If you’re a nonresident, records that separate Michigan wages from non-Michigan wages

For official forms and Treasury instructions, use the Michigan Department of Treasury’s individual income tax forms and instructions page.

Step 4: Fill out MI-1040 with the 2025 rules in mind

Michigan’s main individual return is MI-1040. Expect this workflow:

1. Report income using the figures you already report on your federal return, then adjust using Michigan’s additions and subtractions.
2. Apply Michigan subtractions that fit your situation (including retirement-related rules that tie to the Lowering MI Costs Plan).
3. Calculate Michigan tax at 4.25% on Michigan taxable income.
4. Apply credits you qualify for, such as the Homestead Property Tax Credit if eligible (Michigan increased the maximum taxable value to $165,400 in the update described in the source).
5. Reconcile withholding and payments to see whether you owe or get a refund.

If you lived outside Michigan but earned Michigan income, you’ll usually need the nonresident/part-year schedule that connects to MI-1040 so Michigan only taxes the proper share at 4.25%.

Step 5: Don’t miss the retirement break that’s rolling into full effect

Retirement taxes are one of the biggest reasons people choose where to settle. Michigan’s Lowering MI Costs Plan (Public Act 4 of 2023, signed March 7, 2023, and effective February 13, 2024) phased out Michigan tax on qualifying retirement and pension income over several years.

Here’s the phase-in schedule from the source:

• 2023: 5% of benefits exempt
• 2024: 35% of benefits exempt
• 2025: 65% of benefits exempt
• 2026+: 100% exempt

That means on a 2025 return, many retirees can subtract 65% of qualifying retirement and pension income before the 4.25% tax is calculated. Starting in tax year 2026, the source says qualifying retirement income becomes fully exempt from Michigan income tax under the Lowering MI Costs Plan.

This point matters for immigrants nearing retirement, including family-sponsored immigrants and investor immigrants, because your “first year” in Michigan might be a part-year year. If you arrive late in 2025, you may still want to map out whether bigger retirement distributions make more sense once the Lowering MI Costs Plan reaches the 100% exemption in 2026.

The source also notes that Social Security is fully exempt from Michigan tax.

Step 6: Watch for 2025 law changes that can change your Michigan taxable income

Michigan’s 2025-2026 budget, signed by Governor Gretchen Whitmer on October 7, 2025 (described in the source as 2025-PA24), made a major structural change: Michigan “decoupled” from certain federal tax law changes after December 31, 2024. In plain English, some deductions that appear on the federal side may not carry over cleanly to Michigan.

For newcomers who work wage jobs, the most visible parts may be new deductions described in the source for qualified overtime wages and qualified TIPS (available 2025–2029). For immigrants working long shifts in manufacturing, health care support roles, hospitality, or other hourly jobs, those deductions can change Michigan taxable income before the 4.25% calculation.

For immigrant entrepreneurs and small business owners—especially those running capital-heavy operations—the source flags tighter Michigan treatment for items like bonus depreciation, Section 179 expensing limits, and R&D expensing rules. Even if you file federal and Michigan returns from the same accounting software, you may not get the same answer in both places after Michigan’s decoupling.

Step 7: Plan for city income taxes if you live or work in a taxing city

Michigan’s 4.25% is only the state layer. The source highlights that local income taxes can apply too. For example, Detroit has its own city income tax (with different rates for residents and nonresidents), and other cities—including Grand Rapids—also levy city income tax.

If you move into a city with income tax, build it into your first-year budget so your take-home pay matches reality. Many immigrants are surprised when city tax withholding shows up after a job transfer.

Step 8: File on time, pay on time, and know what to do if you must fix a mistake

For 2025 returns, the source gives the standard deadline: April 15, 2026. If you request more time to file, remember that an extension is usually more time for paperwork, not more time to pay what you owe.

If you discover later that you reported the wrong residency dates or missed a subtraction tied to the Lowering MI Costs Plan, you may need to amend. Michigan generally uses MI-1040X for amendments (check the Treasury forms page linked above). Keeping copies of your filed MI-1040, W-2s, and residency proof for at least three years is a practical safety net, especially for immigrants who later apply for loans, mortgages, or other benefits that ask for past returns.

Throughout the process, keep coming back to three anchors: the flat 4.25% rate, the retirement relief timeline under the Lowering MI Costs Plan, and careful preparation of MI-1040 with the right schedules when you’re part-year or nonresident.