Tax Law Changes Impact Those at Home and Abroad

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We are only beginning to understand the impact of the recently passed Tax Cuts and Jobs Act of 2017. Like all other reform measures, it promises to simplify the tax filing process. However, this will not necessarily be the case.

Recent commentary discusses how this act will impact those who work remotely. While we have seen significant increases in the number of individuals who use their laptop to work from home, these individuals may feel the impact of changes to the tax law.

For example, under the foreign earned income exclusion classified in Section 911 of the Internal Revenue Code, taxpayers are able to exclude a significant amount of income. This exclusion, however, requires that the taxpayer have their “tax home” in a foreign nation and not have an “abode” in the U.S.

There is little guidance pertaining to what a “tax home” and an “abode” actually is. This is only one area of confusion for taxpayers when it comes to changing tax regulations.

States may change their tax codes in response to the new federal tax act

The Tax Cuts and Jobs Act of 2017 does provide opportunities for certain individuals and businesses to reduce their tax obligations. However, even such a reduction can cause issues for taxpayers when it comes to filling out their state returns.

As states have historically modeled their tax codes after the Internal Revenue Code, states will continually need to reconsider whether they wish to continue conforming with the Internal Revenue Code in this manner. By continuing to model themselves after the federal code following passage of the new tax act, states could see reduced revenues.

Instead of continuing to follow the federal code, states may change reporting requirements to make up for decreased revenues. Thus, any reduced tax obligations for individuals under the federal code could still mean individuals will pay more in state taxes.

Confusion may mean taxpayers will require advice and guidance

As Michigan taxpayers need to abide by both the IRS code and state tax laws, they likely will need extensive guidance in filing their returns. Reporting may be more complex. Also, discrepancies in returns could lead to audits and penalties that taxpayers would otherwise wish to avoid.

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