Q: We heard on the news that this might be the largest tax refund season in a long time. Why is this happening and why would anyone want a big tax refund?
A: Yes, it is likely this tax season will kick out one of the biggest piles of tax refunds in recent memory. The reason has to do with a big tax bill passed back in July of last year. While the bill was signed this past July, it was made retroactive back to the start of 2025. It created a number of new tax breaks.
Basically, there were three big ones. First, it introduced no federal tax on tips, up to certain limits. It also added a tax break for overtime pay. Again, up to a limit. Finally, it provided an additional “senior” deduction for those 65 and up.
But here’s the real reason for the large expected tax refunds when people file their returns. The IRS purposely didn’t provide updated information to payroll processors that would have allowed them to adjust workers’ tax withholding. In other words, too much was taken out of paychecks all along the way last year. This was presumably done on purpose to create large refunds in an election year.
While a big tax refund might feel a bit like a bonus, it’s really a sign the US Treasury held your money without paying you interest. Ideally, people should want their tax withholding set so they won’t owe much money or get much back at tax time.
Q: I’m a very young retiree, turning 59 this year, and I heard that I might now get a deduction in Michigan for my IRA withdrawals. I thought only older retirees got that break. Is this really true?
A: It is true. Starting this year, retirees born in 1967 or later will now benefit from Michigan’s retirement income deduction. This is the final year of a multi-year transition back to the old rules that used to exempt most retirement income from Michigan income tax.
Way back in 2011, Gov. Rick Snyder controversially signed a law that gradually began taxing pension and IRA distributions for younger retirees born after 1945. Then, starting in 2023, Gov. Gretchen Whitmer set the whole process in reverse. A new law was passed to basically bring back the old retirement income deduction. The reversal was done in phases. We’ve now reached the final year of that four year transition. It now applies to everyone.
This year, for people born in 1967 or after, you can now fully deduct your retirement income from your Michigan tax return. It is subject to certain limits, of course. If you are married, the maximum deduction is around $135,000. If you are single, it’s about $67,000.
By reaching age 59 this year, you’ve now crossed the threshold. You now join the ranks of most Michigan retirees who pay very little — or nothing at all — in state income tax!