2023 Michigan Exemption reduced to $1500

$1500 is correct.

Line 9 of MI Form MI-1040 (emphasis added):

9. EXEMPTIONS. NOTE: If someone else CAN claim you as a dependent, check box 9e, enter 0 on line 9a and enter $1,500 on line 9e (see instr.)

Why are you not claiming him as a dependent?

With the federal  tax law change, effective 2018, most students will get the same refund whether they claim themselves or not. The personal exemption has been eliminated and the standard deduction increased.

The usual reason is that the parent is not eligible for the education  credit. 

While technically there is a provision that allows your student-dependent to claim a federal tuition credit, from a practical matter it seldom works out.  A student, under age 24, is only eligible for the refundable portion of the American Opportunity Credit (AOTC) if he/she supports himself by working. He cannot be supporting himself on student loans & grants and 529 plans and parental support.  It is usually best if the parent claims that credit.  

If the student actually has a tax liability, there is a provision to allow him to claim a non-refundable tuition credit. But then the parent must forgo claiming the student as a dependent, and the $500 other dependent credit.  The student must still indicate that he can be claimed as a dependent, on his return. This is worth up to $2500 (AOTC shifts to all non refundable)

Q. What I don't understand is , why MI-1050 9e. says Claimed as Dependent and shows 1500 instead of full exemption of 5400 in 9a., when I am NOT going to claim him at all. 

A. The rule in MI is the same, as on the federal return; if he qualifies as somebody else's dependent, he cannot claim himself, even if that somebody else doesn't actually claim him.  There is no longer a consequence, on the federal return, because exemptions were eliminated in 2018. 

In the personal info section, you entered:

1. Another Taxpayer CAN claim me as a dependent ? YES

2. Will They ACTUALLY claim me as a dependent ? NO

That info carries over to the state return.

Q. This is where I need to to interpret correctly that even if my son is NOT claimed by anybody,

MI-1050 will not allow full exemption since he is considered as "dependent" all along. 

Is that correct ?

A. Yes.

You go on to say:

Do either of these statements apply to the other Taxpayer (which is me)

3. This person is required to file a tax return - NO

4. This person is filing taxes for reason OTHER than getting a refund for taxes  paid - NO 

Q. So technically the 1st Question should be answered as NO. Right?

A. No. Questions 3 & 4 are another way of determining whether he CAN be claimed as a dependent. If you answer 3 & 4 as No, TT will uncheck the box on the federal return.  What I don't know, for a fact, is whether that same rule applies to MI. I don't find it in the MI instructions. Since TT is not allowing it, it probably doesn't.