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Khouri: Federal Tax Cut Will Block Michigan Taxpayers From Claiming Exemptions

January 9, 2018

Changes to the federal tax code in President Donald Trump’s year-end tax cut package would indeed eliminate the ability of Michigan residents to claim personal exemptions on their state income tax returns, Treasurer Nick Khouri stated in a letter Wednesday responding to an inquiry from Patrick Anderson.

“I think it is incumbent on the legislature to address it directly to make those changes in statute,” Khouri said. And the sooner the better. 

Various tax experts have offered opinions on the implications of the Tax Cut and Jobs Act adopted by Congress just before Christmas. Gov. Rick Snyder has said he believes it eliminates personal exemptions and so would raise Michigan taxes. House Tax Policy Chair Jim Tedder (R-Clarkston) wants the Michigan legislature to act to restore them quickly. 

Anderson, president of the Anderson Economic Group, contended in a letter to Khouri that he has a different reading, that Congress didn’t eliminate exemptions, just set them to zero through 2025. He asked Khouri to issue an “administrative statement” on the matter.

“You are right about the facts. Federal tax reform did not explicitly eliminate personal exemptions, instead setting the value of each exemption at zero,” Khouri wrote to Anderson today. “But state law is clear, the number of exemptions for state taxation is determined by ‘the number of exemptions or dependency exemptions allowable on the taxpayer’s federal income tax return’. Since the federal 1040 will not require taxpayers to calculate personal exemptions that have zero value, Michigan residents would not be able to claim personal exemptions on their state tax returns under current state law.” 

Khouri also doesn’t want it left an open question. 

“More generally, and more important, we do not want to leave an ambiguous tax situation open for interpretation by individual state officials or the courts,” he stated. “Addressing uncertainty for taxpayers is a key responsibility of the state Legislature. That is why I believe it is incumbent upon the Legislature to clarify the treatment of personal exemptions for state tax purposes in-light-of recent changes at the federal level.” 

Khouri told MIRS it’s important for state lawmakers to act soon, since the federal changes went into effect Jan. 1. And Michigan taxpayers may want to adjust their withholdings, up or down, based on how the changes impact them. 

“I agree it’s an issue that should be addressed immediately,” Khouri wrote to Anderson. “We can both agree that Congressional action to change the federal personal exemption should not lead to an unintended increase in Michigan’s individual income taxes.” 

Technically, the fix should be simple, he said. The change needed is only a couple of sentences in the state tax code. 

“What happened at the federal level was they eliminated the personal exemption, but they increased dramatically what is called the standard deduction to offset most of that impact on individuals for federal taxes,” Khouri explained. “Our exemptions are tied to the federal code, but our deductions aren’t. They are independent of the federal code, so that is why we are only getting one side of the change in federal tax law.” 

The Department of Treasury continues to review the federal tax reform, which Anderson called “long and confusing.” But Khouri said he expects to have a more detailed analysis on the federal changes and their implications for Michigan’s tax code ready for lawmakers by the Consensus Revenue Estimating Conference this Thursday. 

“It’s a complicated change and the effect on the state is complicated,” Khouri said. “We continue to review the provisions of the federal code, so we will have more next week.”

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