How the One Big Beautiful Bill Changes Taxes for Michigan Residents in 2026

The One Big Beautiful Bill Act is now law, and it reshapes the federal tax picture for 2026 and beyond. Michigan taxpayers at every income level will feel the effects. Service workers, hourly employees, retirees, and high-net-worth families all stand to benefit from specific provisions in this legislation. The changes are broad, but the details matter. A misunderstanding of the new rules could mean leaving money on the table or, worse, triggering an audit.

At Maule Law, we have spent the past several weeks analyzing the full text of the bill and its implications for our clients. This article breaks down the five most significant tax changes and offers practical guidance for each. Whether you earn tips, work overtime, collect Social Security, or are planning your estate, you need to understand how these provisions apply to your specific situation.

No Tax on Tips: A $25,000 Federal Income Exclusion

The OBBBA introduces a new above-the-line deduction for tip income, capped at $25,000 per year. Qualifying workers can exclude up to that amount from their federal taxable income. This applies to cash tips, credit card tips, and any gratuities reported through an employer's payroll system. The provision targets workers in food service, hospitality, personal care, and similar industries where tipping is customary. If you are a server at a restaurant or a valet at a hotel, this benefit is designed for you.

The reporting requirements have not changed. You must still report all tip income to your employer using Form 4070 or an equivalent system. The IRS will continue to compare reported tips against credit card records and employer sales data. What changes is the bottom line on your return. Up to $25,000 of that reported income simply drops off your taxable calculation. For a full-time server earning $30,000 in tips annually, this could reduce federal tax liability by $3,000 to $5,500 depending on filing status and other income.

One word of caution: this exclusion applies only to federal income tax. Michigan's individual income tax does not automatically conform to every federal change. As of this writing, Lansing has not passed conformity legislation for the tip exclusion. Michigan taxpayers should prepare for the possibility that tip income remains fully taxable at the state level, at least for the 2026 tax year. We recommend setting aside state tax on tip income until the legislature acts.

No Tax on Overtime: Up to $12,500 Excluded

Hourly workers who log more than 40 hours per week now receive a targeted tax break. The OBBBA allows employees to exclude up to $12,500 in overtime pay from federal taxable income each year. This applies to wages paid at time-and-a-half or higher rates under the Fair Labor Standards Act. The exclusion covers only the premium portion of overtime, not the base rate for those hours. If your regular rate is $30 per hour and you earn $45 per hour for overtime, the excludable amount is calculated on the full $45-per-hour overtime wage.

Manufacturing, healthcare, construction, and logistics workers across Michigan frequently exceed 40 hours per week. A factory worker in Dearborn putting in 10 hours of overtime weekly at $45 per hour earns roughly $23,400 in annual overtime pay. Under the new law, $12,500 of that escapes federal taxation entirely. That translates to real savings of $1,500 to $2,750 depending on the worker's tax bracket.

Employers must accurately code overtime wages on your W-2. If your payroll department lumps all hours together, the exclusion becomes difficult to claim and easy for the IRS to question. Review your pay stubs now and confirm that overtime hours and overtime pay appear as separate line items. If they do not, raise the issue with your HR department before year-end. Salaried employees generally do not qualify for this provision unless they are classified as non-exempt under federal labor law.

New $4,000 Senior Deduction for Taxpayers 65 and Older

The bill creates an additional $4,000 deduction for taxpayers who have reached age 65. This deduction is available on top of the existing standard deduction and the current additional standard deduction amount for seniors. You claim it directly on Form 1040. No separate schedule or application is required. The deduction phases out for single filers with adjusted gross income above $75,000 and for joint filers above $150,000.

For a married couple, both over 65 and filing jointly with $120,000 in retirement income, the combined effect is meaningful. They receive the increased standard deduction, the existing senior bonus amounts, and now an additional $4,000 each. That is $8,000 in new deductions that did not exist last year. At a 22% marginal rate, the federal tax savings come to $1,760. For retirees on a fixed income, that amount covers a month of groceries or a property tax installment.

Retirees drawing from traditional IRAs or 401(k) plans should revisit their distribution strategy. The additional deduction creates more room to take distributions at lower effective tax rates. If you have been delaying withdrawals to minimize taxes, this is a good year to reconsider. Converting a portion of a traditional IRA to a Roth IRA may also be more attractive now, since the extra deduction offsets some of the conversion income. Talk to your tax advisor before making large withdrawals or conversions.

Permanent $15 Million Estate Tax Exemption

The estate and gift tax exemption had been scheduled to drop from approximately $13.99 million per person back to around $7 million at the end of 2025. That sunset created years of uncertainty and forced many families into aggressive gifting strategies. The OBBBA eliminates the sunset entirely and raises the exemption to $15 million per person, indexed for inflation going forward. For married couples using portability, the combined exemption now exceeds $30 million.

This permanent fix changes the estate planning calculus for high-net-worth families in Michigan. Irrevocable trusts funded solely to capture the higher exemption before a sunset may no longer be necessary. Grantor retained annuity trusts, intentionally defective grantor trusts, and other complex vehicles should be re-evaluated in light of the higher and now permanent threshold. Some of these structures still make sense for asset protection or income tax planning reasons, but the estate tax urgency that drove their creation has diminished.

We strongly recommend that any Michigan resident with an estate valued above $5 million schedule a review of their existing plan. Trust documents drafted before 2026 often contain formula clauses that reference the federal exemption amount. Under the new $15 million baseline, those formulas may produce unintended results, such as funding a bypass trust with far more assets than the surviving spouse expected. A straightforward document review and update can prevent costly surprises down the road.

Higher Standard Deduction Amounts for 2026

The OBBBA increases the standard deduction above the inflation-adjusted baseline that would have applied for 2026. Single filers see the standard deduction rise to $16,000, and married couples filing jointly receive $32,000. These figures represent a meaningful jump compared to 2025 levels. Head-of-household filers also see a proportional increase. The higher deduction means fewer taxpayers will benefit from itemizing.

For homeowners in areas with higher property values, the decision between itemizing and taking the standard deduction requires fresh analysis. The $10,000 SALT deduction cap remains in place. If your combined state income tax, property tax, and local taxes stay under $10,000, and your mortgage interest plus charitable contributions do not push your total itemized deductions above $32,000 for a joint return, the standard deduction wins. Run both calculations before filing.

Taxpayers who previously itemized solely because of large mortgage interest deductions should pay special attention. If you refinanced in recent years at a lower rate, your annual interest expense may have dropped enough that the new, higher standard deduction now exceeds your itemized total. Switching to the standard deduction simplifies your return and reduces audit risk. Keep your records in case you need to switch back in a future year, but take the larger deduction when it is available.

Michigan-Specific Considerations

Michigan imposes a flat 4.25% individual income tax. The state does not automatically adopt every federal change. Each new federal provision requires either legislative action or an administrative ruling from the Michigan Department of Treasury before it affects your state return. As of February 2026, Michigan has not enacted conformity legislation for the tip exclusion or the overtime exclusion. The senior deduction and standard deduction increases may or may not flow through to your state return depending on how Michigan defines adjusted gross income for the 2026 tax year.

Michigan does not impose its own estate tax. The state repealed its estate tax in 2019. The federal estate tax exemption increase therefore has no direct Michigan counterpart, but it still benefits Michigan residents whose estates would have been subject to federal estate tax. Families with property in multiple states should also check whether those other states impose estate or inheritance taxes with lower exemption thresholds.

We expect the Michigan legislature to address federal conformity during the 2026 session. Until then, plan conservatively. Assume that Michigan will tax income that the federal government now excludes, and set aside funds accordingly. If the state does conform, you will receive a refund or credit. If it does not, you will be prepared.

What You Should Do Now

Start with your W-4. If you earn tips or overtime, your current withholding likely does not account for the new exclusions. You may be over-withholding, which means lending money to the government at zero interest. Submit an updated W-4 to your employer reflecting the lower taxable income. Use the IRS Tax Withholding Estimator to dial in the correct amount.

Schedule a tax planning session before the end of the first quarter. The earlier you adjust your strategy, the more benefit you capture for the full 2026 tax year. Retirees should model their distribution plans under the new deduction. Business owners with tipped or hourly employees should update payroll systems and educate their workforce about proper reporting. Estate plans drafted before 2026 need a fresh review to account for the $15 million exemption.

At Maule Law, I work with individuals, families, and small businesses. I am available to review your specific situation and help you take full advantage of the One Big Beautiful Bill Act. Contact Maule Law to schedule a consultation.