I'm not specifically familiar with MI rules  and MI TurboTax (TT) software, but most other states have a similar rule.  This is how it usually works:

You must first identify in the federal personal info section that you are military. This will prompt the state software to ask the right question.  In the state section you will be asked to enter the military income that is exempt (usually box 1 of your W-2).  That is, the TT software does not automatically exempt your military pay, you must re-enter it as a deduction, in the state section.

I ran into the same issue today. Provided all the necessary information about rank, National Guard, etc. on the Federal input screens, and it's still including the DFAS income in the Michigan income. In addition, there is no way to manually adjust (remove) that income on MI-Sch 1. Now I have to paper file the MI return.
Intuit, you need to fix this, or at least give the user the ability to make adjustments.
Note: I worked 15 years at a major competitor of Intuit so I'm not a rube.
If you get a workaround from Intuit, please post it here.

In the case of the MI state return in both the online and desktop versions when you enter your W2 information in the Federal Interview be sure in the follow on pages you select that the pay was "Active Duty Military".  The active duty pay will then be automatically excluded from you MI state return.  

When you click through the state interview, you will get a notification in all versions that your military pay was excluded and show you the amount that was excluded.