Does Michigan Tax Overtime in 2026?
Likely no - Michigan is expected to recognize the federal overtime deduction, but official guidance is pending. Michigan's HB 4961 IRC adoption (reported by Forvis Mazars) appears to capture the OBBBA, which would mean the federal overtime deduction (IRC §225) reduces Michigan taxable income. However, the Michigan Department of Treasury has not yet published a Revenue Administrative Bulletin confirming this treatment. If confirmed, workers would save 4.25% on up to $12,500 ($25,000 MFJ) in qualifying overtime premium pay. Workers in cities with local income taxes (Detroit: 2.4%) could see additional savings.
How Michigan's Overtime Tax Treatment Works
Michigan's conformity to the OBBBA overtime deduction depends on how its IRC adoption framework incorporates the new provision.
HB 4961 IRC adoption: Michigan's HB 4961 updated the state's IRC conformity framework. According to Forvis Mazars (a national accounting firm), this adoption captures the OBBBA provisions, including the overtime deduction (IRC §225). This means the deduction should be part of Michigan's tax law.
Pending Treasury guidance: The Michigan Department of Treasury has not published a Revenue Administrative Bulletin or specific guidance confirming the overtime deduction applies for Michigan income tax purposes. This is notable because Treasury typically issues RABs to clarify significant tax law changes. The absence of OBBBA-specific guidance creates uncertainty.
Practical impact: If conformity is confirmed, a worker with $12,500 in qualifying overtime (the federal cap for single filers) would save $531.25 in state tax at 4.25%. A Detroit resident would save an additional $300 in city income tax (2.4%), for combined savings of $831.25. For MFJ filers at the $25,000 cap, the state savings alone would be $1,062.50.
Federal Overtime Deduction Quick Reference
| Detail | Value |
|---|---|
| IRC Section | §225 (OBBBA) |
| Maximum deduction | $12,500 overtime ($25,000 MFJ) |
| Deduction type | Above-the-line (Schedule 1-A) |
| FICA still applies? | Yes (Social Security 6.2% + Medicare 1.45%) |
| MFS eligible? | No (MFJ or Single/HoH only) |
| Effective dates | Jan 1, 2025 – Dec 31, 2028 |
| Michigan treatment | Partial (own exclusion) |
| What qualifies? | Overtime premium only (the 0.5x above regular rate), FLSA non-exempt employees |
Worked Examples Comparing Federal and Michigan Treatment
Example 1: Auto worker (single filer, $55,000 income, $8,000 overtime premium)
Qualifying overtime premium: $8,000
Overtime deduction claimed: $8,000 (capped at $12,500)
Estimated federal tax savings: $960.00
Michigan return:
Michigan is expected to recognize the federal overtime deduction based on HB 4961 IRC adoption (reported by Forvis Mazars), but official Treasury guidance has not been issued. If confirmed, the $8,000 deduction would save approximately $340 in state tax (4.25%). Detroit residents could save an additional $192 in city income tax (2.4%). Until Treasury issues specific guidance, these savings are probable but not guaranteed.
Example 2: Nurse (single filer, $80,000 income, $12,500 overtime premium - federal cap reached)
Qualifying overtime premium: $12,500
Overtime deduction claimed: $12,500 (capped at $12,500)
Estimated federal tax savings: $2,750.00
Michigan return:
If Michigan confirms conformity to the OBBBA overtime deduction, the $12,500 deduction would save approximately $531.25 in state tax (4.25%). Detroit residents could save an additional $300 in city income tax (2.4%). Official Treasury guidance is still pending as of August 2026.
Michigan's Manufacturing Workforce and Overtime
Michigan's economy is heavily centered on manufacturing, particularly in the automotive sector. Overtime is a regular feature of factory work, especially during production surges for new model launches and supply chain recovery periods. The federal OBBBA overtime deduction cap of $12,500 (single) / $25,000 (MFJ) is particularly relevant for Michigan's large hourly workforce.
At Michigan's 4.25% state rate, the potential state-level savings for a worker at the single-filer cap is $531.25. For a married couple filing jointly at the $25,000 cap, the savings is $1,062.50. These figures make Michigan one of the higher-impact states if conformity is confirmed, given its combination of a substantial flat rate and a large overtime-earning workforce.
Detroit and City Income Tax Considerations
Detroit residents face the highest city income tax in Michigan at 2.4% (non-residents working in Detroit pay 1.2%). Combined with the 4.25% state rate, Detroit residents pay a total of 6.65% on earned income including overtime. If the overtime deduction flows through to the city tax base, a Detroit resident at the $12,500 federal cap would save approximately $831.25 in combined state and city taxes.
Other Michigan cities with income taxes (Grand Rapids, Flint, Lansing, Saginaw, and approximately 20 others) typically levy 1% on residents and 0.5% on non-residents. The combined rate for workers in these cities would be approximately 5.25%.
Conformity Recheck Date – September 1, 2026
Our records indicate that Michigan's OBBBA conformity status should be rechecked on or after September 1, 2026. The Department of Treasury may issue guidance through a Revenue Administrative Bulletin or updated MI-1040 filing instructions. This page will be updated when official guidance is published.
Related Tools
- No Tax on Overtime Calculator - calculate your federal overtime deduction
- Michigan Tax Guide - full state tax overview
- Michigan Paycheck Calculator
- Does Michigan Tax Tips?
- W-2 Code TP: Tips Reporting Guide
- W-2 Code TT: Overtime Reporting Guide
- All 51 States: Tips & Overtime Tax Map