Does Michigan Tax Overtime in 2026?
No - Michigan does not tax qualifying overtime premium pay for 2026 through 2028. Michigan confirms conformity via H.B. 4961 (signed October 7, 2025). The Michigan Treasury published a Taxpayer Notice on January 6, 2026 confirming that the federal overtime deduction (IRC §225) reduces Michigan taxable income. Workers 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%) save at both the state and city level.
How Michigan's Overtime Tax Treatment Works
Michigan's conformity to the OBBBA overtime deduction is confirmed through two authoritative actions.
H.B. 4961 (signed October 7, 2025): Michigan's H.B. 4961 updated the state's IRC conformity framework, capturing the OBBBA provisions including the overtime deduction (IRC §225). This legislation made the deduction part of Michigan tax law.
Michigan Treasury Taxpayer Notice (January 6, 2026): The Michigan Department of Treasury published a Taxpayer Notice on January 6, 2026 confirming that overtime deductions apply for Michigan income tax purposes for tax years 2026 through 2028. This removes any prior uncertainty for workers and tax preparers.
Practical impact: A worker with $12,500 in qualifying overtime (the federal cap for single filers) saves $531.25 in state tax at 4.25%. A Detroit resident also saves $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 is $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 | Conforms |
| 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 confirms conformity via H.B. 4961 (signed October 7, 2025). The Michigan Treasury published a Taxpayer Notice on January 6, 2026 confirming overtime deductions for tax years 2026 through 2028. The $8,000 deduction saves approximately $340 in state tax (4.25%). Detroit residents also save $192 in city income tax (2.4%).
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:
Michigan confirms conformity via H.B. 4961 (signed October 7, 2025). The Michigan Treasury published a Taxpayer Notice on January 6, 2026 confirming overtime deductions for tax years 2026 through 2028. The $12,500 deduction saves approximately $531.25 in state tax (4.25%). Detroit residents also save $300 in city income tax (2.4%).
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 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. Michigan's combination of a substantial flat rate and a large overtime-earning workforce makes the confirmed OBBBA deduction especially impactful here.
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. The confirmed overtime deduction reduces the city tax base, so a Detroit resident at the $12,500 federal cap saves 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 Confirmed: Tax Years 2026 Through 2028
Michigan's conformity to the OBBBA overtime deduction is confirmed via H.B. 4961 (signed October 7, 2025) and the Michigan Treasury Taxpayer Notice published January 6, 2026. The deduction applies for tax years 2026 through 2028. Workers and tax preparers can monitor michigan.gov/taxes for any subsequent updates.
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