Michigan Governor Signs Law Exempting Tips and Overtime from Income Tax

News Summary

Governor Gretchen Whitmer has enacted a new law in Michigan that exempts tips, certain overtime pay, and Social Security income from the state’s income tax. Effective next year, this legislation aims to help around 300,000 workers, saving them hundreds of dollars annually. The initiative aligns Michigan’s tax policy with recent federal tax provisions, enhancing financial relief for service workers and retirees. The tax exemption is temporary, expiring on January 1, 2029, but it signifies continued efforts to support the state’s low-income workforce.

Trenton – Governor Gretchen Whitmer has signed a new law that will exempt tips, certain overtime pay, and Social Security income from Michigan’s 4.25% income tax starting next year. This legislation, which was approved by the Michigan Legislature last week, seeks to align state tax policy with federal tax provisions enacted in July by President Donald Trump, which also provide similar exemptions with specific limitations.

The signing took place at Mom’s Restaurant in Trenton, where Whitmer was joined by a bipartisan group of lawmakers, highlighting the impact this bill will have on local service workers. House Republicans emphasized the importance of this tax exemption during recent budget negotiations, aiming to mirror the new federal tax law and avoid disappointing workers reliant on tips and overtime pay.

According to projections, approximately 300,000 Michigan workers are expected to benefit from this change, saving an average of $400 annually in state taxes on tips. When combined with the federal tax breaks, these workers could see their total savings increase to approximately $1,500. In terms of overtime pay, workers are expected to save an average of $500 in state income taxes, with potential additional savings of $1,500 in federal taxes.

The new exemption builds on previous tax rollbacks enacted in Michigan, including the 2023 exemption of income taxes on pension income and an expansion of the Earned Income Tax Credit aimed at supporting low-income families.

The owners of Mom’s Restaurant expressed that the new law will notably improve their employees’ take-home pay and make payroll management simpler. The law is particularly pivotal for food and beverage workers, who often depend heavily on tips for their income. This measure is expected to offer substantial financial relief, making a difference in meeting essential expenses such as rent and food.

However, it is worth noting that the tax exemption is temporary, valid only for the years 2026, 2027, and 2028, with an expiration date set for January 1, 2029. The federal One Big Beautiful Bill Act further enhances support by allowing workers to deduct up to $25,000 in taxable income from tips or overtime compensation. Additionally, retirees can benefit from a $20,000 income tax exemption for single filers or $40,000 for joint returns, alongside the ability to deduct Social Security income from taxable income.

This law is expected to impact a significant segment of the workforce in Michigan positively. As the state prepares for these changes, the emphasis on supporting low-income workers continues to be a priority for lawmakers, ensuring that financial burdens are alleviated for those who rely on tips, overtime hours, and Social Security benefits.

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