Michigan isn’t always the first state that comes to mind when Americans think about tax-friendly retirement destinations. But Matt Kidd, president of Kidd Advisors and Kidd Financial Planning, says the state deserves a closer look.
Kidd, who is also a PFP Champion for the American Institute of CPAs (AICPA), says many retirees can exclude much or all of their retirement income from Michigan income tax. Social Security benefits are fully exempt, and the state imposes no estate or inheritance tax.
He also cautions that affluent retirees and snowbirds face planning issues that deserve careful attention before making a move.
Below is a transcript of the interview with Kidd, edited for brevity and clarity.
What makes Michigan attractive for retirees?
Bob Powell: Is Michigan a good state for retirees from a tax perspective?
Matt Kidd: Absolutely. When you look at the overall cost of living and our tax structure, Michigan is an excellent place to retire.
Which retirement income taxes matter most?
Bob Powell: Which taxes have the biggest effect on retirement income?
Matt Kidd: The biggest factor is that most people’s retirement income is exempt. Pensions, IRA distributions, and 401(k) withdrawals are exempt up to fairly high limits, roughly $65,000 to $70,000 for individuals and about double that for married couples filing jointly. Social Security benefits are also 100% exempt from Michigan income tax.
How are pensions treated?
Bob Powell: Does that include private, public, and military pensions?
Matt Kidd: Private pensions generally receive the same treatment as traditional IRAs and 401(k)s. Public pensions currently receive somewhat more favorable treatment, although the difference has narrowed as the law has changed over the past several years.
Military pensions are fully exempt.
What retirement accounts qualify?
Bob Powell: Does that include traditional IRAs, 401(k)s, 403(b)s, and 457 plans?
Matt Kidd: Nearly everything reported on Form 1099-R qualifies. One notable exception is deferred compensation, which is generally taxed like wages.
What income remains taxable?
Bob Powell: What about retirees who continue working?
Matt Kidd: Wages remain fully taxable. For most taxpayers, dividends and interest are also taxable. There are additional deductions for people born before 1946, but those apply to fewer taxpayers every year.
Bob Powell: How are capital gains taxed?
Matt Kidd: Michigan taxes capital gains as ordinary income. They don’t receive a preferential rate like they do at the federal level. They’re generally taxed at the state’s 4.25% income tax rate.
How do property taxes work?
Bob Powell: What should retirees know about property taxes?
Matt Kidd: Property taxes are generally moderate. Annual increases are capped, and many retirees qualify for Michigan’s Homestead Property Tax Credit, depending on household income and the taxable value of their home.
Someone who has owned a home for decades may still qualify because taxable value doesn’t necessarily rise as quickly as market value.
What other taxes should retirees know?
Bob Powell: What about sales taxes?
Matt Kidd: Most purchases are subject to Michigan’s 6% sales tax, but groceries and prescription medications are exempt.
Bob Powell: Does Michigan have an estate or inheritance tax?
Matt Kidd: No. Michigan has neither a state estate tax nor an inheritance tax.
Why affluent retirees should plan carefully
Bob Powell: What should affluent retirees know?
Matt Kidd: They still receive the retirement income subtraction, but large required minimum distributions can exceed those limits. Investment income, including dividends, interest, and capital gains, is also taxed at 4.25%, so higher-income retirees lose some of the advantages available to middle-income households.
Business owners generally continue to benefit from Michigan’s relatively business-friendly tax environment, particularly if income flows through a pass-through entity.
What should snowbirds consider?
Bob Powell: What should retirees know if they’re splitting time between Michigan and states such as Florida?
Matt Kidd: If you spend less than six months outside Michigan, you’re generally still considered a Michigan resident for tax purposes.
If you establish residency elsewhere, be sure you can document it. That’s an area the state pays close attention to.
Another issue many people overlook is property taxes. Giving up Michigan’s principal residence exemption can substantially increase property taxes. In some cases, those higher property taxes offset much of the income tax savings from moving.
When should retirees consider Roth conversions?
Bob Powell: Are there planning opportunities before moving to Michigan?
Matt Kidd: If a Roth conversion already makes sense from a federal tax standpoint, completing it while living in a state with no income tax could save Michigan income tax as well.
But I wouldn’t recommend making a Roth conversion solely to avoid Michigan’s 4.25% income tax if it doesn’t also make sense federally.
What misconceptions remain?
Bob Powell: What’s the biggest misconception about retiring in Michigan?
Matt Kidd: The retirement income subtraction has changed several times over the past five or six years, creating confusion. Beginning in 2026, the rules become much more straightforward than they were under the previous system.
Who benefits most?
Bob Powell: Who is the ideal retiree for Michigan?
Matt Kidd: Middle- and upper-middle-income retirees benefit the most because much, if not all, of their retirement income may qualify for Michigan’s exemptions. Affluent retirees will pay more tax, but compared with many other states, Michigan’s income tax remains relatively modest.
Why retire in Michigan?
Bob Powell: Before we wrap up, anything else retirees should know?
Matt Kidd: We focused on taxes, but I think the best reason to retire to Michigan is all the beautiful lakes and natural beauty that we have to experience.
