Michigan No Tax on Overtime: Federal + State Deduction Guide
Federal and State Deductions — Michigan Gets Both
Michigan no tax on overtime is not just a federal benefit. Michigan is the only state in the country that actively chose to adopt the federal overtime and tips deductions at the state level. Under H.B. 4961 (signed October 2025, effective as 2025 PA 24), qualifying Michigan workers can deduct their overtime premium from both federal and Michigan state taxable income for tax years 2026–2028 — saving on the federal rate plus Michigan’s flat 4.25% income tax.
For context on how the federal deduction works, see the complete No Tax on Overtime guide. To check whether you meet the four federal eligibility requirements, use the eligibility checker. For states that have not conformed, see California or New York.
Timeline: Federal vs. Michigan Deduction
The most common source of confusion about the Michigan overtime tax deduction is the timing gap between the federal and state provisions. The federal deduction covers tax years 2025–2028. Michigan’s state deduction covers 2026–2028 only — it does not apply to 2025.
| Tax Year | Federal Deduction | Michigan State Deduction |
|---|---|---|
| 2025 | Yes — IRC §225, Schedule 1-A | No — not available |
| 2026 | Yes | Yes — H.B. 4961 |
| 2027 | Yes | Yes — H.B. 4961 |
| 2028 | Yes | Yes — H.B. 4961 |
| 2029+ | Expires (unless renewed) | Expires (unless renewed) |
How the Michigan Overtime Deduction Works
Michigan’s state overtime deduction mirrors the federal deduction parameters. It applies Michigan’s flat 4.25% income tax rate to the same qualifying overtime premium amount. Like the federal version, it is a below-the-line deduction — it reduces Michigan taxable income but does not reduce AGI. FICA (7.65%) still applies to all overtime earnings at the federal level.
| Parameter | Federal | Michigan State |
|---|---|---|
| Deductible portion | 0.5x OT premium | Same — mirrors federal |
| Cap (single/HoH) | $12,500 | Same — mirrors federal |
| Cap (MFJ) | $25,000 per return | Same — mirrors federal |
| Phaseout start | $150K / $300K MAGI | Same — mirrors federal |
| Tax rate | 10%–37% (marginal bracket) | 4.25% flat |
| Tax years | 2025–2028 | 2026–2028 |
| MFS eligible? | No | No |
| FLSA §7 required? | Yes | Yes |
For the full breakdown of federal caps, phaseout math, and worked examples, see the income limits and phaseout chart. For detailed rules including double-time and comp-time treatment, see no tax on overtime rules and limits.
Combined Federal and State Savings: Michigan Examples
The following examples show combined federal and Michigan state tax savings for 2026–2028. Federal savings are calculated using bracket-spanning methodology; Michigan savings use the flat 4.25% rate on the same deduction amount. All scenarios assume single filing, MAGI below phaseout, and 50 weeks per year.
Scenario 1: $20/hr, 5 OT hrs/wk
| Component | Amount |
|---|---|
| 0.5x OT Premium | $2,500 |
| Federal Savings (12%) | $300 |
| Michigan Savings (4.25%) | $106 |
| Combined Savings | $406 |
Scenario 2: $25/hr, 10 OT hrs/wk
| Component | Amount |
|---|---|
| 0.5x OT Premium | $6,250 |
| Federal Savings (22%) | $1,375 |
| Michigan Savings (4.25%) | $266 |
| Combined Savings | $1,641 |
Scenario 3: $40/hr, 15 OT hrs/wk (Hits Cap)
| Component | Amount |
|---|---|
| Raw 0.5x OT Premium | $15,000 |
| Cap Applied | $12,500 |
| Federal Savings (22%) | $2,750 |
| Michigan Savings (4.25%) | $531 |
| Combined Savings | $3,281 |
No Tax on Tips in Michigan
H.B. 4961 also adopted the federal tips deduction (IRC §224) at the Michigan state level, following the same 2026–2028 timeline. Qualifying tipped workers in occupations listed on the IRS Treasury Tipped Occupation Codes (TTOC) list can deduct up to $25,000 in qualifying tips from both federal and Michigan taxable income.
Tips must be voluntary cash or charged tips (not service charges, mandatory gratuities, or digital assets) received in a TTOC-listed occupation. The same phaseout thresholds apply: $150K single/HoH, $300K MFJ. For the complete tips guide, see No Tax on Tips.
Nonresident Workers in Michigan
If you live outside Michigan but earn overtime working in the state, you may only deduct the portion of qualifying overtime attributable to services performed in Michigan on your Michigan state return. The federal overtime deduction applies to all qualifying overtime regardless of where the work was performed. Consult a tax professional if you split work across multiple states.
How to Claim the Michigan Overtime Deduction
For tax year 2025 (federal only): Claim the overtime deduction on Schedule 1-A, Part III. The deduction flows to Form 1040 Line 13b. For 2025, W-2 reporting is voluntary — check Box 14 for a label like “QUAL OT” or “TT.” If not listed, calculate from pay stubs using the IRS method: divide total overtime pay by 3 for the 0.5x premium. (IRS Notice 2025-69)
For tax years 2026–2028 (federal + Michigan): Claim the federal deduction on Schedule 1-A as above. Your employer will report qualified overtime in W-2 Box 12 using Code TT (mandatory starting 2026). For the Michigan state deduction, claim the same qualifying amount on your Michigan individual income tax return. The Michigan deduction uses the same dollar amount as the federal deduction, taxed at 4.25%.
Not sure if you qualify? Use the eligibility checker to verify your FLSA status, filing status, and SSN requirement. For your personalized savings estimate, use the savings calculator.
Frequently Asked Questions
Does Michigan have no tax on overtime?
Yes. Michigan adopted both the federal overtime and tips deductions at the state level through H.B. 4961 (2025 PA 24), signed by Governor Whitmer in October 2025. For tax years 2026–2028, Michigan workers can claim both a federal deduction (via Schedule 1-A) and a Michigan state deduction at the 4.25% flat rate. For tax year 2025, only the federal deduction is available.
When does Michigan’s overtime deduction start?
Michigan’s state-level overtime deduction begins with tax year 2026 and runs through 2028. It does not apply to the 2025 tax year. The federal deduction covers 2025–2028. So Michigan workers filing their 2025 return claim federal only; starting with 2026 returns, they claim both.
How much will I save in Michigan with no tax on overtime?
For 2026–2028, Michigan workers save on both federal and state taxes. Example: a worker earning $25/hr with 10 OT hours per week saves approximately $1,375 in federal tax (22% bracket) plus $266 in Michigan state tax (4.25%), totaling $1,641 per year. Workers hitting the $12,500 cap can save up to $3,281 combined. Use the overtime tax calculator for your personalized estimate.
Do I get both federal and state overtime deductions in Michigan?
Yes, for tax years 2026–2028. Michigan is the only state that actively chose to adopt the federal overtime deduction at the state level. The state deduction mirrors the federal caps and phaseout thresholds, applying Michigan’s flat 4.25% income tax rate. For 2025, only the federal deduction applies. (MI Treasury Notice)
Does Michigan’s deduction apply to tips too?
Yes. H.B. 4961 adopted both the overtime deduction (IRC §225) and the tips deduction (IRC §224) at the state level. Qualifying tipped workers in TTOC-listed occupations can deduct up to $25,000 in tips from Michigan taxable income for 2026–2028, in addition to the federal tips deduction. See the No Tax on Tips guide.
What about nonresidents working in Michigan?
Nonresidents who earn overtime in Michigan may only deduct the portion of qualifying overtime attributable to services performed in Michigan on their state return. The federal deduction applies to all qualifying overtime regardless of where you work.
Is married filing separately eligible in Michigan?
No. Married filing separately (MFS) is not eligible for either the federal or Michigan state overtime deduction. If married, you must file jointly (MFJ) to claim the deduction. The MFJ cap is $25,000 per return, not per spouse. (IRS FAQ A5)
What happens after 2028?
Both the federal overtime deduction (P.L. 119-21) and Michigan’s state deduction (H.B. 4961) expire after the 2028 tax year. Unless Congress extends the federal provision or Michigan’s legislature renews H.B. 4961, overtime will be fully taxable again at both levels starting in 2029.