Michigan Subtractions from Income
**Part-Year and Nonresidents can only subtract the following that are attributable to Michigan.**
Military Pay from US Armed Forces
Enter compensation received for active duty in the U.S. Armed Forces included in AGI. Note: Compensation from the U.S. Public Health Service is not considered military pay.
Retirement Benefits that are Exempt from Michigan Income Tax
Qualifying retirement and pension benefits included in your Adjusted Gross Income may be subtracted from income. The amount you may subtract depends on the source of the benefits (public or private).
Qualifying Benefits Include:
- Pension plans that define eligibility for retirement and set contribution and benefit amounts in advance.
- Qualified retirement plans for the self-employed.
- Retirement distributions from a 401(k) or 403(b) plan attributable to employer contributions or attributable to employee contributions to the extent they result in matching contributions by the employer.
- IRA distributions received after age 59 1/2 or described by Section 72(t)(2)(A)(iv) of the IRC (series of equal periodic payments made for life).
- Benefits from any of the previous plans received due to a disability, or as a surviving spouse if the decedent qualified for the subtraction at the time of death.
- Benefits paid to a senior citizen (age 65 or older) from a retirement annuity policy that are paid for life (as opposed to a specified number of years).
You may subtract all qualifying retirement and pension benefits included in AGI and received from the following public sources:
- The State of Michigan
- Michigan and local governmental units (e.g., Michigan counties, cities, and school districts)
- Tier 2 railroad retirement
- Federal civil service
- Military retirement from the U.S. Armed Forces.
For public and private pension retirement benefits, you may not subtract:
- Amounts received from a deferred compensation plan that lets the employee set the amount to be put aside and does not set retirement age or requirements for years of service. These plans include, but are not limited to, plans under Sections 401(k), 457, and 403(b) of the IRC (Internal Revenue Code).
- Amounts received before the recipient could retire under the plan provisions, including amounts paid on separation, withdrawal, or discontinuance of the plan.
- Amounts received as early retirement incentives, unless the incentives were paid from a pension trust.
Michigan State Income Tax Refund
You may subtract Michigan state and city income tax refunds and homestead property tax credit refunds that were included in AGI. Note to Farmers: You may subtract (to the extent included in AGI) the amount that your State or city income tax refund and homestead property tax credit exceeds the business portion of your homestead property tax credit.
Education Savings Program (ESP)
You may deduct, to the extent not deducted in calculating AGI, the total of all contributions less qualified withdrawals (compute the contributions and withdrawals separately for each account) made during 2011 by the taxpayer in the tax year to accounts established through the Michigan ESP, including the MAP. The deduction may not exceed $5,000 for a single return or $10,000 for a joint return per tax year. There are numerous education savings accounts available from other states and investment companies, but Michigan only allows a tax deduction for contributions to accounts established through MESP and MAP.
Michigan Education Trust (MET)
You may deduct the following:
- If you purchased a MET contract during 2011, you may deduct the total contract price (including the processing fee).
- If you made a charitable contribution to the MET Charitable Tuition Program during 2011, you may deduct the total contribution amount. You will receive a statement from MET to confirm the amount. All charitable donations will go toward providing scholarships to foster care students at Michigan public colleges.
- If you purchased a MET payroll deduction or monthly purchase contract, you may deduct the amount paid on that contract during 2011 (not including fees for late payments or insufficient funds). You will receive an annual statement from MET specifying this amount.
- If you have terminated a MET contract, you may deduct the amount included in AGI as income to the purchaser.
Other Income Attributable to Other States
Nonresidents and part-year residents should complete Schedule NR. Attach federal schedules.
- Business income that is taxed by Michigan and another state must be apportioned. You must complete MI-1040H.
- Capital gains from the sale of real property or tangible personal property located outside of Michigan must be adjusted on MI-1040D.
- Michigan residents cannot subtract salaries and wages or other compensation earned outside Michigan. However, they may be entitled to a tax credit for income tax imposed by government units outside Michigan.
- Residents may subtract: a) Net business income earned in other states and included in AGI, and b) Net rents and royalties from real property or tangible personal property located or used in another state.
Other Subtractions Include
- Any part of a qualified withdrawal from an MESP account, including the MAP, included in AGI.
- Contributions to national or Michigan political parties or candidates. The maximum deductions are $50 on a single return and $100 on a joint return.
- Benefits from a discriminatory self-insured medical expense reimbursement plan, to the extent these reimbursements are included in AGI.
- Proceeds and prizes included in AGI won in State of Michigan-regulated bingo, raffle, or charity games.
- Amount of salary and wage expense that cannot be deducted on your federal return because you are claiming a work opportunity credit, clinical testing (orphan drug) credit, or research credit.
- Losses from the disposal of property reported in the Michigan column of your MI-1040D, line 13, or MI-4797, line 18b(2).
- Amount used to determine the credit for elderly or totally and permanently disabled from U.S. Form 1040A or Form 1040 Schedule R, line 22.
- Michigan NOL deduction.
- Gross income included in AGI from Michigan gas and oil royalty interest or working interest.
- The amount of a distribution from individual retirement accounts that qualify under IRC section 408 if the distribution is used to pay qualified higher education expenses (tuition, books, fees, etc.) at a postsecondary educational institution.
- Holocaust victim payments.
- To the extent included in AGI, a qualifying distribution from a pension or retirement plan that is contributed to a qualifying charitable organization. To qualify, you must make the payment to the charity within 60 days of receiving the distribution, and reduce the amount of the contribution by any pension subtraction taken and two times the total amount of credits claimed for a public contribution credit, homeless shelter/food bank credit, and the community foundation credit.
Renaissance Zone Deduction
To be eligible you must meet all the following requirements:
- Be a permanent resident of a Renaissance Zone for at least 183 consecutive days.
- Be approved by your local assessor’s office.
- Must not be delinquent for any State or local taxes abated by the Renaissance Zone Act.
- Must file MI-1040 each year.
- Have gross income of $1 million or less.
If you were a full-year resident of a Renaissance Zone, you may subtract all income earned or received. Unearned income such as capital gains may have to be prorated. If you lived in the Zone at least 183 consecutive days during 2011, you may subtract the portion of income earned while a resident of the Zone. If you are a part-year resident of a Zone, you must complete and attach a Schedule NR.
Note: Certain Renaissance Zones began to phase out in 2007. The tax exemption is reduced in increments of 25 percent during the Zone’s final three years of existence. If you are a resident of a Zone that is phasing out (check with your local unit of government), you must reduce your deduction as follows:
- 25 percent for the tax year that is two years before the final year of designation as a Renaissance Zone
- 50 percent for the tax year immediately preceding the final year of the designation as a Renaissance Zone
- 75 percent for the tax year that is the final year of the designation as a Renaissance Zone.
For additional information pertaining to Michigan Subtractions from Income, please click here.