Does Michigan Tax Your Tips and Overtime in 2026?

Michigan does not tax qualifying tips and overtime pay in 2026. Under Michigan Public Act 24 of 2025, the state adopted the federal One Big Beautiful Bill Act (OBBBA) deduction definitions for tax years 2026 through 2028. Eligible Michigan workers receive both federal and state tax deductions.

Key takeaways for Michigan workers

• Michigan conforms to the federal tip and overtime deductions starting in tax year 2026.
• Qualifying workers save the state flat income tax rate of 4.25 percent on deducted amounts.
• Taxpayers claim the state subtraction on Michigan Form MI-1040 Schedule 1.
• City income taxes in cities like Detroit, Grand Rapids, and Flint require separate evaluation.

Michigan conformity under Public Act 24

Michigan individual income tax law begins with federal adjusted gross income. When Congress passed OBBBA, Michigan lawmakers enacted Public Act 24 of 2025 to harmonize state tax law with federal policy. Read our broader state conformity tracker and verify official publications on the Michigan Department of Treasury portal.

The Michigan legislation incorporates the federal definitions for qualified tips under section 224 and qualified overtime compensation under section 225 of the Internal Revenue Code. For tax year 2026, Michigan allows taxpayers to subtract these federal deductions when computing Michigan taxable income.

This conformity delivers immediate relief across manufacturing plants in Warren, healthcare networks in Ann Arbor, and restaurants throughout Grand Rapids and Detroit. Michigan workers reduce both federal and state tax burdens simultaneously.

Claiming the deduction on Michigan Form MI-1040 Schedule 1

To claim the Michigan tax break, filers must first calculate their federal deduction on federal Schedule 1-A. The qualifying amounts then transfer to Michigan Schedule 1 (Additions and Subtractions).

Michigan Schedule 1 includes designated lines for the qualified tip subtraction and the qualified overtime subtraction. Subtracting these amounts lowers your Michigan taxable income, yielding direct state tax savings equal to 4.25 percent of the deducted amount. A worker who deducts $10,000 in overtime saves $425 on Michigan state taxes in addition to federal savings.

If a worker claims both a $15,000 tip deduction and a $5,000 overtime deduction, the combined $20,000 subtraction saves $850 in Michigan state income taxes, compounding federal tax savings.

Local city income taxes in Michigan

A vital detail for Michigan workers is local municipal taxation. Twenty-four cities in Michigan levy a local income tax under the Michigan City Income Tax Act (Act 284 of 1964). Prominent examples include Detroit (2.4 percent for residents, 1.2 percent for non-residents), Grand Rapids (1.5 percent resident), Lansing, and Flint.

City income taxes do not automatically adopt state-level subtractions unless the local ordinance or state city-tax statute is amended. Workers in Detroit and other taxing cities should verify whether local Form CF-1040 requires an addback of federal Schedule 1-A amounts. Learn about calculating overtime deductions in our overtime calculation guide.

Updating your Michigan withholding forms

Because Michigan conformed for 2026, workers can adjust both federal and state tax withholding. Update federal Form W-4 to reduce federal withholding, following our W-4 adjustment guide.

For state withholding, submit a revised Michigan Form MI-W4 to your employer. Claiming additional allowance equivalents on line 6 of Form MI-W4 ensures that your 4.25 percent state tax savings arrive in your biweekly or weekly paychecks rather than accumulating as a large annual refund. Check your paystubs after one or two pay cycles to verify that state withholding accurately reflects your new allowances.

Frequently asked questions

Did Michigan conform for the 2025 tax year?

No. Public Act 24 made the Michigan deduction effective for tax years beginning on or after January 1, 2026. For the 2025 tax year, federal deductions did not apply at the Michigan state level.

How much do I save on Michigan state taxes?

You save 4.25 percent of your qualifying deducted amount. For example, claiming the full $25,000 tip deduction saves $1,062.50 in Michigan state income taxes, on top of federal savings.

Do Michigan auto factory workers qualify for overtime deductions?

Yes, if they are non-exempt hourly employees under the FLSA and receive qualifying time-and-a-half overtime. Contractual double-time premiums beyond the FLSA requirement do not qualify.

Where do I report the deduction on my Michigan return?

You report it as a subtraction on Michigan Schedule 1, which attaches to your Michigan Form MI-1040 individual return.

This article is general information, not tax advice. Tax rules and payroll reporting require exact records. Consult a qualified CPA, Enrolled Agent, or tax attorney regarding your individual return.