You are correct. If you wife spent no time physically working in New York (NY) in 2020, then no wages should be taxed to NY. Because of this, there should be no credit for taxes paid to another state on your resident state, Michigan (MI), return.
Instead you should report all income on the MI return, and zero income on the NY return. This can be accomplished by entering zero wages for NY on the W-2 that belongs to your wife. Leave the NY withholding, then enter all the wages on the MI return.
This will complete the returns accurately and all NY withholding should be refunded, while it's likely you will owe on the MI return.
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