- Michigan will eliminate the 4.25% income tax on earnings from tips, overtime, and Social Security, thanks to a new law signed by Governor Gretchen Whitmer.
- This exemption is set to last until the end of 2028, unless further legislative action is taken.
- The tax reductions were part of a bipartisan agreement aimed at boosting the state budget and funding for road improvements.
On Wednesday, under a decision made by Gov. Gretchen Whitmer, Michigan will stop collecting income taxes on tips, overtime pay, and Social Security for the upcoming three years.
According to a statement from Whitmer’s office, this tax exemption will benefit roughly “up to 300,000” workers who earn tips, potentially saving them about $400 each year. Meanwhile, the overtime exemption would help around 500,000 workers save an average of $500 annually.
The National Employment Law Project estimates that in 2023, approximately 139,000 Michiganders work in tip-earning positions, as per data from the Bureau of Labor Statistics. To gain the $400 tax benefit, a worker must earn and report over $9,400 in tips within a year.
Whitmer’s office anticipates that the exemption for Social Security income may not have as broad of an effect, projecting that around 40,000 seniors could save $500 annually. This stems from the fact that eligibility for this benefit is in addition to the existing $20,000 tax deduction available for retirement income for those aged 67 and older.
“Removing taxes on tips, overtime, and Social Security allows us to put money back in the hands of hundreds of thousands of Michiganders. They can use that money to pay bills and buy groceries,” Whitmer stated in a message to Bridge Michigan on Thursday.
The legislation specifies that these three tax credits will lapse post-2028 unless lawmakers enact changes or pass new legislation to extend them.
This decision mirrors certain measures and campaign promises made during President Donald Trump’s tax reform strategies. However, unlike Trump’s “One Big Beautiful Bill Act,” Social Security income is still taxed.
State House Speaker Matt Hall, a Republican from Richland Township, emphasized that tax reductions remain the highest priority for his party.
Whitmer signed the law during a dinner in Trenton, a city in a competitive Senate district currently represented by Democratic state Sen. Darin Camilleri. He stated that the budget reflects “real progress for working and middle-class families.”
Nonpartisan analysts from the Michigan Senate have projected that the state will forgo around $158 million in revenue next year due to this personal income tax exemption.
The bill also avoided implementing certain business tax breaks that could have significantly impacted state revenue, according to financial analysts.
In addition to tax modifications, the legislation includes a detailed funding strategy intended to channel more state resources toward road maintenance. This includes a 20-cent increase in the gas pump tax, the removal of the sales tax on gasoline, a reallocation of corporate tax revenue originally designated for economic development, and a new 24% wholesale tax on marijuana.
This adjustment isn’t the only change affecting tipped workers this year. Earlier, a late-night agreement in the Legislature capped substantial hikes in Michigan’s minimum tipped wage. According to a ruling from the Michigan Supreme Court, tipped wages will climb from $4.01 an hour to about $15 an hour by 2031, aligning with the standard minimum wage. However, many tipped workers expressed concerns that they might lose earnings, fearing customers would reduce their tips if they believed servers were making more money.
The law signed by Whitmer proposes raising the tipped wage to only $7.50 by 2031, which is half of the regular minimum wage, though it could be adjusted for inflation and end up being higher.
