Minnesota Ends Tax Reciprocity With Wisconsin

[Bees Knees]

Looks like alot of people are now going to have to file two state tax returns.

http://kstp.com/news/stories/S1147048.shtml?cat=1

[mblatour]

Wow!

This is really going to affect many of my returns as I live in Duluth. Many of my clients are from Duluth,MN and Superior,WI and cross the bridge/border to work in the other city/state. What a bummer that they couldn't get things worked out. Just one more thing to deal with this next tax season........

Becky

[JON]

The question is

does it go back to January 09 or 10. Obviously withholding changes have to take place when it is in affect... Now I will go read it.

[Larmil]

This is really going to affect many of my returns as I live in Duluth. Many of my clients are from Duluth,MN and Superior,WI and cross the bridge/border to work in the other city/state. What a bummer that they couldn't get things worked out. Just one more thing to deal with this next tax season........

Becky

Expect new clients. I am close to the MO/KS border and I have a number of clients with both states (many are simple returns and they could do the federal themselves). I learned long ago not to do "states only". If I do I will charge the full price for the federal and states.

[FEDUKE404]

So more non-resident returns?

If I understand this correctly, you are going to have a lot of folks who are legal residents of state A but who regularly work in state B.

State B will require a non-resident income tax return for the wage income earned there. (State B will appear on the Form W2?).

State A will require a regular (resident) income tax return for all income earned, and will hopefully give some state tax credit as an offset to the tax liability for State B.

Sounds aggravating, but doable especially with some adequate tax software.

FE

[Bees Knees]

I didn’t know that states with reciprocal agreements pay each other for the taxes their residents incur on earnings in the other state. I just thought that it meant a resident working in the other state is simply not subject to the other state’s tax. How do the two states keep track of what is owed to each other, if the tax returns are not filed that way?

[JON]

It is effective

for tax years after December 31, 2009. The articles said the problem was the slow pay from Wisc to MN. There are more Wisc residents working in MN than the other. Now if Wisc residents are working in MN they will have MN withholding and file a MN return taking a credit for MN taxes on Wisc-the opposite for MN residents working in Wisc.

It was tough to understand the slow pay from Wisc-what it meant!!! MN claims it will mean a hundred million more in the next two years???

[Corduroy Frog]

Wisconsin Individual Credit

I'm not familiar with either state's tax structure, but I have been told that Wisconsin allows the typical "credit for taxes paid to other states" on their individual Wisconsin return. Nothing earthshaking, as this is like any other state.

However, the credit is NOT limited to Wisconsin rates!! In other words, whatever is paid comes off the Wisconsin return, even if the rate in the other state is higher!!

The loss of reciprocity means that more Badger people are now going to be filing this credit. If the rates in Minnesota are higher, this is going to cost Wisconsin even more money. (Of course, a simple act by the legislature could correct this)

And there also may be collection of less taxes as both states would rather depend on each other for payment (even if late) that to process and try to collect returns which are balance due. Keep in mind the usual steamrolling process of individuals in collecting taxes now has to do their steamrolling in the collection system of a different state. I'm sure MN and WI took this into account when the decision was made.

[Snaggletooth]

Money Trail

I didn’t know that states with reciprocal agreements pay each other for the taxes their residents incur on earnings in the other state. I just thought that it meant a resident working in the other state is simply not subject to the other state’s tax. How do the two states keep track of what is owed to each other, if the tax returns are not filed that way?

I am also somewhat baffled by the money trail. I'm taking an interest because I do about a dozen states, some of them with reciprocity (although no MN or WI returns).

Baffled because if there is no non-resident return filed, then all the withheld tax would be paid in by the employer. If so, where in this scenario does any state have to pay the other?

The layout of population centers in MN and WI means maybe 3 times as many Wisconsin commuters to MN as vice-versa. I would estimate this same kind of ratio exists with Illinois for WI residents with Rockford and Lake Michigan. Their non-populous borders with Michigan and Iowa would not create much of a factor either way (no offense meant, Dubuque). It appears WI may be a big loser to out-of-state filings if they cannot assess their own residents, or give up credits that exceed their own tax rate.

[mblatour]

MN has a higher tax rate

than WI, which means there could definitely be an issue there. Both Snag and Bees made interesting points. I just know that this is going to confuse a lot of people.....and unfortunately I am in the middle of those people. I'd better brush up on my skills a little more before tax season arrives.

Larmil: good point. Let's hope that it does mean more returns for me and not just more headaches. I already know I don't charge enough for out-of-state returns. I do feel bad raising my rates during such a tough time in the economy. What to do......

Becky

[taxdude71]

I'm sure this will be another one of those things the state does that gets reversed in a year or two due to too many confused tax payers.
This is going to cause a huge mess for people that work in both states.