LIMIT ON RETIREMENT INCOME DEDUCTION; MODIFY S.B. 1 (S-2):
SUMMARY AS PASSED BY THE SENATE
Senate Bill 1 (Substitute S-2 as passed by the Senate)
Sponsor: Senator Kevin Hertel
Committee: Finance, Insurance, and Consumer Finance
Date Completed: 1-31-23
CONTENT
The bill would amend the Income Tax Act to allow a taxpayer, beginning in the 2023
tax year, to elect to deduct, without further limitation, his or her eligible Federal or
State public retirement and pension benefits, Social Security benefits, and an
inflation-adjusted amount for retirement benefits from another retirement or
pension system or a retirement annuity policy, and to modify the amount of gross
collections from the individual income tax (IIT) that the Department of Treasury
must deposit into the State School Aid Fund (SAF).
Modifications to Limitations & Restrictions of Retirement Income
Under the Act, "taxable income" means, for a person other than a corporation, estate, or
trust, adjusted gross income (AGI) as defined in the Internal Revenue Code, subject to the
adjustments specified in the Act. These adjustments generally include a deduction to the
extent included in AGI for certain retirement or pension benefits. Under current law, the
specific deduction that a taxpayer may claim depends on the year in which he or she was
born, particularly with respect to seniors and those who receive retirement or pension
benefits. The deductions for these types of income are subject to various limitations and
restrictions specified in the Act, which are discussed in BACKGROUND.
Under the bill, beginning with the 2023 tax year, in determining taxable income, a taxpayer
could elect to apply the current limitations or restrictions, or instead could elect to deduct his
or her eligible retirement and pension benefits received from a Federal or State public
retirement system, Social Security benefits, and a maximum of $56,961 for a single return
and $113,922 for a joint return for the 2022 tax year (these amounts are adjusted for
inflation) for retirement benefits from another retirement or pension system or a retirement
annuity policy without any limitations or restrictions.
Distributions to SAF
The Act currently requires that percentage of the gross collections before refunds from the
IIT that is equal to 1.012% divided by the income tax rate (i.e., currently approximately
23.81% of gross collections) be deposited in the SAF. Under the bill, this would apply through
fiscal year (FY) 2022-23. After that, that percentage of the gross collections before refunds
from the IIT that is equal to 1.045% divided by the income tax rate would have to be
deposited into the SAF.
MCL 206.30 & 206.51
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BACKGROUND
Retirement Income Deduction; Limitations
As noted above, an individual's taxable income is computed in part by deducting various
retirement or pension income. The deduction for other retirement or pension income is subject
to various limitations and restrictions specified in the Act, depending on age and date of birth.
These are grouped and discussed below.
Born before 1946. For an individual born before 1946, a taxpayer may deduct to the extent
included in AGI, military, National Guard, or railroad pension and retirement income. A
taxpayer also may deduct, to the extent included in AGI, eligible retirement and pension
benefits received from a Federal or State public retirement system, Social Security benefits,
and a maximum of $56,961 for a single return and $113,922 for a joint return for the 2022
tax year (the amounts in statute are set at $42,240 (single), $84,480 (joint), but are adjusted
for inflation) for retirement benefits from another retirement or pension system or a
retirement annuity policy.
Born in 1946-1952. For an individual born in 1946 through 1952, the sum of the deduction
for the benefits described above, except for Social Security benefits, is limited to $20,000 for
a single return and $40,000 for a joint return. After he or she reaches the age of 67, the
deduction for those benefits does not apply and he or she is eligible for an unrestricted
deduction of $20,000 for a single return and $40,000 for a joint return against all types of
income. A person who takes the deduction for a military, National Guard, or railroad pension
or retirement benefits is not eligible for the unrestricted deduction.
In addition, for these taxpayers, and for taxpayers born after 1945 and who retired as of
January 1, 2013, if the taxpayer receives retirement or pension benefits from employment
from a governmental agency not covered by the Social Security Act, the sum of the deduction
is limited to $35,000 for a single return and $55,000 for a joint return. If both spouses on a
joint return receive these benefits, the deduction is limited to $70,000. After he or she reaches
67 years of age, the restrictions do not apply and he or she is eligible for an unrestricted
deduction of $35,000 for a single return, $55,000 for a joint return, or $70,000 for a joint
return if applicable, against all types of income. A person who takes the deduction for a
military, National Guard, or railroad pension or retirement benefits is not eligible for the
unrestricted deduction.
Born after 1952. Except as noted above for those retired as of January 1, 2013, for a person
born after 1952 who is 62 through 66 years of age and who receives retirement or pension
benefits from employment with a government agency not covered by the Social Security Act,
the deduction is limited to $15,000 for a single return and, generally, $15,000 for a joint
return. If both spouses receive these types of benefits, the deduction is limited to $30,000.
Otherwise, when a taxpayer in this category reaches 67 years of age, he or she is eligible for
an unrestricted $20,000 for a single return and $40,000 for a joint return. If the taxpayer
takes this deduction, he or she may not take the deduction for Social Security benefits and
may not claim a personal exemption; a taxpayer may claim the set of deductions/exemptions
that reduces his or her liability the most. A person who takes the deduction for military,
National Guard, or railroad retirement or pension benefits is not eligible for the unrestricted
$20,000/$40,000 deduction.
Joint Returns & Surviving Spouses
For joint returns, the limitations and restrictions listed above are applied based on the older
spouse's date of birth. If a deduction for nonmilitary or nonrailroad retirement or pension
benefits was claimed on a joint return for a tax year in which a spouse died and the surviving
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spouse has not remarried, the surviving spouse may claim the deduction for those benefits in
subsequent tax years subject to the same restrictions and limitations, for a single return, that
would have applied based on the date of birth of the older of the two spouses.
Beginning with the 2020 tax year, a surviving spouse born after 1945 who has reached the
age of 67 and has not remarried since the death of his or her spouse may take the unrestricted
deduction subject to the same limitations and restrictions based on the surviving spouse's
date of birth instead of the deduction allowed for nonmilitary/nonrailroad retirement or
pension benefits for a single return, based on the date of birth of the older spouse.
Legislative Analyst: Jeff Mann
FISCAL IMPACT
Based on estimates from the Department of Treasury, the bill would reduce General Fund
revenue by approximately $187.0 million in fiscal year (FY) 2022-23, $594.0 million in FY
2023-24, $500.0 million in FY 2024-25, and $501.0 million in FY 2025-26. Because of timing
issues reflecting quarterly and annual payments, as well as the enactment date, a portion of
the FY 2022-23 would be shifted into FY 2023-24. Consequently, FY 2024-25 would be the
first full fiscal year not affected by timing issues. The revenue loss would continue to increase
in later years because of population demographics, which are projected to result in an aging
population. These demographic changes will increase the share of total taxpayers affected by
tax provisions on senior or retirement income, meaning that revenue losses from exempt
senior or retirement income will not be fully offset by increased revenues from new entrants
to the tax system.
Fiscal Analyst: David Zin
SAS\S2324\s1sb
This analysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official
statement of legislative intent.
Page 3 of 3 Bill Analysis @ www.senate.michigan.gov/sfa sb1/2324


Statutes affected:
Substitute (S-2): 206.30, 206.51
Senate Introduced Bill: 206.30, 206.51
As Passed by the Senate: 206.30, 206.51