A new tax reform is now law, and it’s set to put more money directly into the hands of millions of Americans. Both the federal and state governments have officially put an end to income taxes on tips, overtime pay, and Social Security income.
The new federal policy was signed into law in July, and it fulfills a major campaign promise made by President Trump to ease the burden on retirees and hourly workers. Now, Michigan has become the first state to formally match the federal changes at the state level, and this move is expected to become a nationwide trend.
New Law Makes Tips, Overtime, and Social Security Income Tax-Free
Under the new Michigan law, the state’s 4.25% income tax has been scrapped and will no longer apply to income earned from tips, Social Security payments, or some forms of overtime. The exemptions are set to begin next year and last through 2028 unless lawmakers extend them.
Gov. Gretchen Whitmer, who signed the bill this week at Mom’s Restaurant in Trenton, called the measure a “win for working people.”
“As any server, bartender or delivery driver will tell you, tips are often the difference between making or missing a rent payment, buying fresh veggies and fruit for your family, or finally making a car repair that you’ve been putting off,” she said.
Whitmer estimated that approximately 300,000 workers in Michigan will be able to save an average of $400 per year from taxes on tips alone. When the new federal exemptions are included, a worker will be able to save about $1,500 annually. Workers who work overtime will save an average of $500 in state taxes and another $1,500 in federal taxes.
“This is a big deal for people who are working hard every single day,” Whitmer added.
How the Federal and State Tax Cuts Work Together
Michigan’s new tax law reflects President Trump’s One Big Beautiful Bill Act, which excludes up to $25,000 of tips or overtime pay earned by workers from federal income tax. Retirees also benefit as they can deduct $20,000 when filing individually and $40,000 if filing jointly. Additionally, all Social Security income is now tax-free.
According to State Rep. Cam Cavitt, R-Cheboygan, the reform will allow single mothers to bring home every dollar they have earned in tips at the end of their long shifts. Additionally, overtime for working fathers will be more impactful.
House Speaker Matt Hall, R-Kalamazoo County, said that matching Michigan’s tax code with the new federal rules was a good move. “How disappointing if they think they’re getting no tax on tips, overtime, and Social Security except when it comes to their state tax,” Hall added.
A Bipartisan Effort with Real Savings
Both parties supported the new rule, and this reflected a rare unity between Democrats and Republicans. Democratic Sen. Darrin Camilleri and Republican Rep. Rylee Linting even joined Whitmer at the signing ceremony to celebrate the reform. This marked a major step for working and middle-class families.
“This balanced budget delivers on the kitchen table issues that make a real difference in people’s lives,” Whitmer said in a press statement. “Our budget fixes the damn roads, cuts taxes for seniors and working families, and increases government efficiency to save taxpayers time and money.”
Temporary Relief with Talk of Making It Permanent
The exemptions will be active until 2028, unless they are renewed. The state is expected to lose approximately $158 million in tax revenue next year. However, both parties have shown interest in extending the policy as long as the economic impact is positive.
For businesses like Mom’s Restaurant, the exemptions will offer immediate benefits. Co-owner Aspasia Dimopoulos said that the law is a win for everyone in the food and beverage industry who relies heavily on tips.
A Boost for the Middle Class
Middle-class retirees and workers will largely benefit from the tax exemptions, as they are set to receive larger paychecks and become more financially stable.
“By ending taxes on tips, overtime, and Social Security, we’re putting money back in the pockets of hardworking Michiganders so they can pay the bills and put food on the table,” Gov. Whitmer says.