Michigan Deduction for Military Pay and Military Retirement

Section 206.30(1)(e) lets a taxpayer deduct, to the extent included in adjusted gross income, compensation including retirement or pension benefits received for services in the Armed Forces of the United States, retirement or pension benefits under the Railroad Retirement Act, and retirement or pension benefits received for services in the Michigan National Guard. The important thing about that subdivision is where it is not. Michigan's treatment of retirement income is one of the more complicated provisions in any state code: subdivision (f) covers public and private pensions and is then cut about by subsections (9), (10) and (11), which set different limits for people born before 1946, in 1946 through 1952, and after 1952, with further special rules for retirees from employment not covered by Social Security, and a phase-in enacted by 2023 PA 4. Military pay and military retirement are in subdivision (e), which none of those limitations touch. So the deduction is unlimited in amount, available at any age, unaffected by the year of birth, and does not consume any part of the general retirement deduction a Michigan retiree may also be claiming for a civilian pension. A retired senior chief drawing $60,000 of retired pay deducts all of it and still has the subdivision (f) allowances available for a second pension. It covers active pay as well as retired pay. "Compensation ... received for services in the Armed Forces" reaches basic pay, so a Michigan resident on active duty deducts their military pay, and a Guard or reserve member deducts drill pay. Michigan National Guard retirement is named separately in (e)(iii), which matters because a state Guard pension is not always "services in the Armed Forces of the United States" and would otherwise fall into the ordinary public pension rules. What is not covered. Michigan taxes at a flat rate and this is a deduction rather than an exclusion at source, so it is claimed on the return; military pay reported on a W-2 is included in adjusted gross income first and subtracted afterwards. VA disability compensation and DIC are not in adjusted gross income at all, so they never reach the Michigan return and need no deduction. A nonresident service member stationed in Michigan is not taxed on military pay by Michigan under the federal Servicemembers Civil Relief Act, and a nonresident military spouse may elect the service member's residence under the Military Spouses Residency Relief Act; neither of those is a Michigan provision but both decide more Michigan returns than this subdivision does.