Introduction: Expat Tax Michigan Planning for British Families in Detroit and Ann Arbor
The expat tax Michigan position rests on one flat rate and one surprise. The state charges 4.25% on almost everything in your federal adjusted gross income, including UK rent, UK dividends and UK capital gains. However, 24 Michigan cities add their own income tax, and that city tax reaches investment income as well as salary. Moreover, neither the state nor any city gives credit for tax paid to HMRC. Consequently, the street you choose can change the bill on your UK income by more than half.
At TaxYork, we prepare federal, state, city and UK returns for British executives, engineers, physicians, academics, investors and company owners across Detroit, Birmingham, Bloomfield Hills, Grosse Pointe, Ann Arbor and Grand Rapids. In our experience, newcomers hear "flat 4.25%" and stop reading. Therefore this expat tax Michigan guide walks through every layer and shows where your UK income lands in each one.
Expat Tax Michigan Basics: Three Layers on One Household
A British family in Michigan can face three income tax layers. First, federal tax reaches worldwide income, relieved by the foreign tax credit on IRS Form 1116. Second, the state taxes residents at 4.25% with no brackets. Third, a resident of a taxing city pays up to 2.4% more on salary, business profits, rent, dividends, interest and gains. Meanwhile, HMRC keeps taxing UK rent and UK property gains throughout.
Who This Guide Is Written For
This guide addresses high-net-worth British nationals, dual national US UK families and accidental Americans living in Michigan, plus Michigan-domiciled Americans working in London. Specifically, it suits senior people in the automotive, mobility, healthcare, university and private capital sectors, together with investors and business owners holding UK property, pensions, ISAs or company shares. If that describes your household, the expat tax Michigan rules below decide how much of your UK income meets each layer.
How Michigan Compares With Our Other State Guides
On rate, the expat tax Michigan burden sits in the middle of the Midwest pack, but the city tax is unusually wide. Ohio charges a flat 2.75% and its cities leave dividends alone, whereas Detroit taxes them. Similarly, Illinois charges a flat 4.95% with no foreign credit but has no city income tax at all. As a result, a Detroit resident can pay 6.65% on UK investment income, which is more than a Chicago resident pays.
How Michigan Taxes High Earners in 2026
For expat tax Michigan purposes, the state taxes high earners at one rate on a broad base. The state starts from federal adjusted gross income, makes a short list of adjustments and applies 4.25% to the result. Therefore the rate is simple, while the base deserves attention.
The Expat Tax Michigan Flat Rate and the Personal Exemption
The rate for 2025 and 2026 is 4.25%, and it applies from the first dollar above your exemptions. Michigan has no standard deduction for working-age taxpayers and does not follow federal itemised deductions. Instead, each taxpayer, spouse and dependant receives a personal exemption, which Treasury sets at $5,900 for 2026. Consequently, a family of four shelters only $23,600, and mortgage interest or charitable giving does nothing at state level.
No Special Rate for Capital Gains or Dividends
Michigan taxes capital gains and dividends as ordinary income. A long-term gain that attracts 20% federally therefore still bears the full 4.25%. Furthermore, the sale of UK shares, a UK investment property or a stake in a UK company all flow in through federal adjusted gross income. In contrast with the federal system, a foreign-source gain earns no state-level relief, as we explain below.
The Surcharge That Did Not Reach the 2026 Ballot
High earners should also watch the constitution. A proposed amendment would add a 5% surcharge on income above $500,000 for single filers and $1 million for joint filers, lifting the top rate to 9.25%. However, the campaign suspended its 2026 effort in March 2026 and now targets the 2028 ballot. Accordingly, the flat rate holds for 2026 and 2027, but a liquidity event planned for 2029 deserves a second look.
Business Owners and the Flow-Through Entity Tax
Owners of partnerships and S corporations can elect to pay Michigan tax at entity level. The election converts a state tax that the federal cap would restrict into a business deduction. Notably, it does nothing for a UK limited company, which Michigan sees only through the dividends and inclusions on your federal return. Therefore British founders with both US and UK entities need the two structures reviewed together in any expat tax Michigan review.
No Credit for UK Tax, but the Exclusion Flows Through
Michigan gives no credit for UK tax. This single rule drives most expat tax Michigan planning, because the federal return hides the problem. Your federal foreign tax credit can wipe out the federal bill on UK income and leave the Michigan bill untouched.
The Resident Credit Stops at the Canadian Border
Michigan's resident credit covers tax paid to another US state, its political subdivisions, the District of Columbia and Canadian provinces. Section 206.255 of the Income Tax Act lists those jurisdictions and no others. Moreover, Treasury's 2025 return instructions state that the credit is not available for tax paid to other foreign countries. As a result, the central expat tax Michigan fact is that UK income tax on your London flat or UK capital gains tax on its sale never reduces the Michigan liability.
Why the Federal Credit Does Not Help
The federal foreign tax credit reduces federal tax, not federal income. Michigan starts from adjusted gross income, which still contains every pound of UK rent and gain. Consequently, the state charges 4.25% on income that HMRC has already taxed at up to 45%. Likewise, the US-UK income tax treaty binds the federal government and does not restrain a state.
The Foreign Earned Income Exclusion Does Flow Through
Michigan does respect the federal exclusion. Treasury confirms that foreign income is taxable only to the extent it sits in adjusted gross income. Therefore salary excluded on IRS Form 2555, up to $132,900 for 2026, escapes the state as well. In practice, this expat tax Michigan relief matters to Americans abroad and almost never to Britons living in Michigan, whose tax home is here.
Michigan Domicile Follows Americans to London
The exclusion matters most to Michigan natives on a London assignment. Revenue Administrative Bulletin 2002-5 says you do not lose Michigan domicile simply by qualifying for the exclusion. Hence a banker who keeps a Bloomfield Hills home and intends to return remains a Michigan resident. Salary above the exclusion, UK bonuses and UK investment income then meet 4.25% with no credit for UK tax. Importantly, choosing the federal credit instead of the exclusion makes this worse, because nothing leaves adjusted gross income.
City Income Taxes: Detroit, Grand Rapids and the Suburbs
Michigan city income taxes reach further than most Britons expect. Twenty-four cities levy one under the same state statute, and the base for residents includes investment income. This is the point most online guides get wrong, and it changes the expat tax Michigan answer for anyone living downtown.
Rates in the Cities Britons Choose
Detroit charges residents 2.4% and non-residents 1.2%. Highland Park charges 2% and 1%, while Grand Rapids and Saginaw charge 1.5% and 0.75%. The remaining cities, including Lansing, East Lansing, Flint and Pontiac, charge 1% and 0.5%. In contrast, Ann Arbor, Birmingham, Bloomfield Hills, Troy, Novi and the Grosse Pointes levy nothing. The Michigan Treasury city tax pages set out which cities tax and who must file.
What the City Taxes, and What It Leaves Alone
A city resident pays on far more than wages. Treasury's 2025 Detroit instructions list compensation, business profits, dividends, interest, capital gains less capital losses and net rental profits as taxable. Furthermore, a resident pays on all of it wherever it arises. UK dividends, ISA income, the gain on UK shares and the profit on a London rental therefore all sit in the Detroit base. Pensions and annuities, by contrast, are exempt once you have reached retirement under the plan.
The Only City Credit Is for Another City
The city credit is narrower still. A Detroit resident may credit income tax paid to another city, capped at the non-resident rate on the same income. No credit exists for tax paid to HMRC. Consequently, UK investment income bears 4.25% plus 2.4% for a Detroit resident, a combined 6.65% with no relief at either level. That figure is the true expat tax Michigan rate downtown.
Commuters and Hybrid Working
Non-residents pay only on work performed in the city and on property located there. A Birmingham resident working downtown therefore pays 1.2% on Detroit workdays and nothing on UK income. Additionally, days worked from home outside the city fall out of the base, provided you keep a work log and your employer adjusts withholding. For senior hybrid workers, that allocation routinely halves the city bill. It forms a routine part of our expat tax Michigan preparation.
UK Pensions, Rent and Gains in Michigan
The expat tax Michigan treatment differs for each kind of UK income, and pensions receive the best treatment. The state restored a generous retirement subtraction in full from 2026, and Treasury accepts that a foreign plan can qualify. However, the conditions favour traditional occupational schemes over personal arrangements.
The Retirement Subtraction Reaches Full Strength in 2026
From tax year 2026, a retiree of any birth year may subtract qualifying retirement benefits up to $67,610 on a single return or $135,220 on a joint return. Treasury's retirement and pension guidance confirms that the four-year phase-in ends at 100%. Previously, the 2025 figures were $65,897 and $131,794, and younger retirees received only part. Therefore 2026 is the first year in which a British retiree in their early sixties can claim the full amount.
Does a UK Pension Qualify?
A UK pension can qualify, but only if it looks like a Michigan pension. Treasury's instructions say that foreign plans meeting Michigan's qualifications may be eligible. Those qualifications favour plans that define retirement eligibility and set contributions and benefits in advance. Accordingly, a UK final salary or career average scheme has a strong claim. On the other hand, the instructions exclude plans that let the employee set the amount and fix no retirement age or service requirement. A SIPP funded by your own contributions therefore carries real doubt, and we document the plan rules before claiming. This remains the least settled corner of expat tax Michigan practice.
The UK State Pension Is Not Social Security
Michigan exempts US Social Security benefits, but the UK State Pension is not one. Under the treaty it is taxable only in America for a US resident, and the whole amount enters adjusted gross income. As a result, it reaches Michigan unless the retirement subtraction covers it. Meanwhile, MoneyHelper explains how UK pensions work for those who move abroad, which helps when gathering scheme documents.
UK Rental Income
Under the expat tax Michigan rules, UK rent is taxed three or four times before relief. HMRC taxes the profit first, usually through the non-resident landlord scheme at 20% unless you apply to receive rent gross. The federal return then taxes the same profit, with depreciation over 30 years, and credits the UK tax. Subsequently, Michigan adds 4.25% and a taxing city adds its own rate, both without credit. Notably, a foreign property depreciates more slowly than a US one, so the state base is often higher than clients expect.
Selling UK Shares or Property
Gains follow the same pattern. A non-resident pays UK capital gains tax on UK residential property at 18% or 24% and must report within 60 days. Federally, the credit usually covers the 20% rate, although the 3.8% net investment income tax accepts no foreign credit. Michigan then charges 4.25% on the dollar gain, and Detroit charges 2.4% more. Therefore timing a large UK disposal before you become a Michigan resident is the most valuable expat tax Michigan step available.
ISAs and UK Funds
An ISA has no status in America. Its interest, dividends and gains are taxable federally each year, then again by Michigan and by a taxing city. Furthermore, UK funds and investment companies inside it are usually passive foreign investment companies reported on IRS Form 8621. Consequently, in expat tax Michigan terms, an ISA that is tax-free in Britain can be the most heavily taxed asset a Detroit resident owns.
Michigan Residency and Domicile
For expat tax Michigan purposes, residency turns on domicile first and day counts second. A resident pays on worldwide income, while a non-resident pays only on Michigan-source income. Therefore the date your residency starts or ends can matter more than any deduction.
Domicile and the Permanent Home Test
You are a Michigan resident if Michigan is your permanent home. Treasury describes that as the place you intend to return to whenever you go away. Administrative Rule 206.5 lists the evidence: where your family lives, where you vote, where you bank and where your cars are registered. Moreover, you keep an old domicile until you intend to abandon it, intend to acquire a new one and are physically present there.
The 183-Day Rule
The day count applies when the evidence is unclear. Under the same rule, a person who lives in Michigan for at least 183 days in the tax year is treated as a resident. Hence a British executive on a two-year posting, with a leased house in Birmingham and children in local schools, is a Michigan resident in practice. Conversely, a short project with a retained UK home may leave you a non-resident taxed on Michigan wages alone.
Part-Year Residents and the Arrival Date
In the year you move, Michigan taxes only income received while you live here, plus Michigan-source income from the rest of the year. The return allocates income from the date of the move on Schedule NR. Accordingly, a UK share sale that completes the week before arrival falls outside Michigan and outside Detroit. A sale completing the week after falls inside both. In our experience, this is the cheapest expat tax Michigan planning point most families miss.
Case Study: The Ashworths in Detroit
The following illustrative case study shows how the expat tax Michigan layers combine for one household in 2026. The figures are simplified, converted to dollars and rounded.
The Facts
James and Priya Ashworth are British citizens holding green cards. James is a senior engineering executive earning $420,000, and the couple have two children. They rent out their former home in Richmond, producing a $40,000 profit, and they hold UK shares and ISAs paying $25,000 in dividends. In 2026 they also sell UK shares at a $60,000 gain. Their adjusted gross income is therefore $545,000, of which $125,000 is UK income. They bought a house in a historic Detroit neighbourhood and James works downtown.
The State Bill
Michigan allows four exemptions of $5,900, or $23,600. Taxable income is therefore $521,400, and tax at 4.25% comes to $22,160. Of that, $5,313 relates to the UK income. HMRC charges about $4,600 on the rent after the personal allowance, yet Michigan credits none of it. Similarly, the dividends and the share gain generally carry no UK tax for a non-resident, so the state charge is simply an extra cost.
The City Bill
As Detroit residents, the Ashworths pay 2.4% on the whole $545,000, or about $13,080 before the small city exemptions. The UK income alone costs $3,000. Had they bought in Birmingham instead, James would pay 1.2% on his Detroit workdays only, at most $5,040, and nothing on the UK income. Consequently, the address costs them roughly $8,000 a year, and more in any year with a large gain.
The Federal Position and the Lesson
Federally, the credit absorbs the UK tax on the rent, so no double federal tax arises. However, state and city income taxes of $35,240 plus $9,000 of property tax total $44,240. The 2026 deduction cap of $40,400 shrinks by 30% of income above $505,000, leaving the Ashworths a cap of $28,400. As a result, almost $16,000 of state and local tax earns no federal deduction. The expat tax Michigan lesson is direct: UK income cost this family $8,313 in Michigan and Detroit tax with no relief anywhere, and selling the shares before arrival would have saved $3,990 of it.
Compliance That Comes With Michigan Residency
Full expat tax Michigan compliance brings state, city and federal filings that all draw on the same UK figures. Getting one wrong usually means getting all of them wrong. Therefore we prepare them from a single reconciled set of numbers.
Deadlines, Extensions and Estimates
The Michigan and Detroit returns are due on 15 April. Michigan honours a federal extension, provided you pay the remaining estimated tax by the original due date and include a copy of the federal form. Otherwise, you file Michigan's own extension application with payment. Additionally, you must make quarterly estimated payments if you expect to owe more than $500, which catches most households with UK rent or dividends.
FBAR and Form 8938
Federal reporting follows you to Michigan. You must file an FBAR when your non-US accounts exceed $10,000 in aggregate at any point in the year, as FinCEN explains. Moreover, US residents file Form 8938 once foreign financial assets pass $50,000 at year end for a single filer or $100,000 for a joint return. UK current accounts, ISAs, SIPPs and workplace pensions all count. Our FBAR and FATCA reporting service covers both forms.
Missed Michigan and City Returns
Missed expat tax Michigan returns are common among new arrivals and among Michiganders abroad. A missed FBAR and missed US tax returns often sit alongside missed city returns, because nobody mentioned the city tax. Fortunately, most cases are fixable when you come forward first. We correct the federal years through our catch-up filing service for missed US tax returns and file the matching state and city years together. Otherwise, interest at one percentage point above prime keeps running on every unpaid balance.
How TaxYork Can Help
TaxYork prepares every return a British family in Michigan needs, from one set of figures. We provide comprehensive tax preparation and compliance rather than opinions without filings. For expat tax Michigan work, that means the federal, state, city and UK returns agree with each other.
Joined-Up Returns
Our expat tax Michigan engagement covers the federal return, the Michigan return, the Detroit or Grand Rapids return and the UK Self Assessment together. Specifically, we convert UK income once, apply the treaty through our treaty and foreign tax credit service, and carry the same numbers into each form. Furthermore, we test the retirement subtraction against your UK scheme rules and keep the evidence on file.
Before the Move, the Purchase or the Sale
The largest expat tax Michigan savings arise before a transaction. We model the residency start date, the choice between a city and a suburb, and the timing of UK disposals through our cross-border planning and preparation service. Likewise, for Michigan natives heading to London, we compare the exclusion with the credit at state level, not only federally.
Conclusion
The expat tax Michigan rules look simple and are not. The state charges 4.25% on your UK rent, dividends and gains and credits no UK tax. A taxing city then adds up to 2.4% on the same investment income, which most guides overlook. On the other hand, the 2026 retirement subtraction can shelter up to $135,220 of a qualifying UK pension for a couple. Ultimately, good expat tax Michigan planning comes down to three decisions: when you arrive, where you live and when you sell. Make them with the numbers in front of you.
Contact Us
If you are a British national in Michigan, or a Michigan-domiciled American working in Britain, we would be glad to prepare your expat tax Michigan returns. Please contact us to book a consultation with a US-UK specialist. Alternatively, email hello@taxyork.com or call 020 3488 8606. We will review your state, city, federal and UK position together and tell you exactly what must be filed.
Disclaimer
This article provides general information only and does not constitute tax, legal or financial advice. Tax rules in Michigan, its cities, the United States and the United Kingdom change frequently, and their application depends on your individual circumstances. The case study is illustrative and uses simplified figures. You should obtain professional guidance tailored to your situation before acting. TaxYork accepts no liability for any loss arising from reliance on this article.