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Tax Conformity: That Ship Has Sailed

The Associated Press had a great overview of the problem presented by the failure of Governor Mark Dayton to negotiate and sign a bill that would bring Minnesota income tax law into conformity with the new federal tax law. The article tries to assign shared- blame between legislators and the governor; that is not fair to legislators who put a bill in front of the governor for his signature. At the start of the session, most observers agreed that this was the one issue that had to be handled.

But Dayton did not offer to negotiate, he just vetoed it. He did not call lawmakers back into special session to get it done. Maybe the GOP should have given him a stand-alone bill. In any event, it is clear that tax conformity was not a priority for the DFL.

Here’s how Dayton summed it up, according to the AP:

Dayton said when he vetoed the bill that the federal tax changes would result in a $59 million tax increase for 300,000 Minnesotans if nothing changed at the state level.

I guess that is a rounding error if you are a state with a $1.5 billion surplus, or a wealthy governor who has never worried about paying his taxes let alone filled out his own tax forms.

How many taxpayers knew that when they voted in the mid-term? How many will be tearing out their hair at tax time?

When Minnesotans have problems getting their taxes done, or have to use or pay more to a tax service, I suggest they lay the blame squarely at the feet of the most stubborn governor in my lifetime, and his party leaders. They are still in office, so you can call and email them.

Who did they think they were helping? Tax conformity had to be done, everyone knew that, and yet here we are with no tax conformity.

My practical take-way from the article is this: if you plan to take the standard deduction for federal taxes (you will not itemize), you might still need receipts for your state taxes.

Here is the AP story in full, with some emphasis from me:

Filing Minnesota state income tax returns for 2018 is going to be more of a pain than usual because lawmakers and the governor left a crucial piece of legislation unfinished, and it’s too late to fix before the upcoming tax season.

The unfinished business was a “tax conformity” bill to sync Minnesota’s income tax rules with the 2017 federal tax overhaul. Democratic Gov. Mark Dayton vetoed a GOP plan in a dispute that mostly centered on school aid, and the session ended without an agreement. While legislative leaders say they want to pass a long-term solution soon after the Legislature reconvenes Jan. 8, taxpayers are still stuck with the rules that now exist.

A rundown on the issue and how it affects taxpayers:

THE PROBLEM

Minnesota’s tax laws are based on how the federal government previously defined taxable income. That changed dramatically under the 2017 federal tax overhaul, which eliminated some deductions that Minnesota still accepts and created new tax breaks that the state still doesn’t allow.

“Pretty much every taxpayer who files an income tax return in Minnesota will be affected by nonconformity, and yes, it’s going to be very complicated. And in some cases a nightmare,” said Elizabeth Bystrom, a White Bear Lake tax preparer and a spokeswoman for the Minnesota Society of Certified Public Accountants.

The federal overhaul nearly doubled the standard deduction to $24,000 for married taxpayers filing jointly, which will eliminate the need for many Americans to itemize their deductions on their federal returns. But Minnesota’s standard deduction of $13,000 for married taxpayers filing jointly hasn’t changed. So many Minnesotans, who might have been able to skip itemizing on their state returns, could lose out on tax breaks unless they itemize.

Taxpayers who’ve been less diligent about record-keeping because they assumed they’d claim the more generous federal standard deduction may regret it, because they still need to document their deductions for their state returns.

WHAT’S IT GOING TO COST ME?

That’s hard to say for sure. Dayton said when he vetoed the bill that the federal tax changes would result in a $59 million tax increase for 300,000 Minnesotans if nothing changed at the state level.

That’s because Minnesota then required taxpayers who take the federal standard deduction to take the state standard deduction, too. But the Minnesota Department of Revenue will now allow taxpayers who take the federal standard deduction to itemize on their state returns. That will preserve itemized deductions, plus personal and dependent exemptions that were eliminated for federal taxes. So that should cancel out at least some of the hike that Dayton cited.

Bystrom said professional tax preparers will be charging more because of the extra time and complexity. “How much? We don’t know,” she said. She also pointed out that the new federal law eliminates the deduction for tax preparation fees.

HOW TO COPE

Leaving it up to a pro is one solution, but state officials have been trying to make the process as simple as they can for do-it-yourselfers.

Minnesota Revenue Commissioner Cynthia Bauerly said her department encourages electronic filing, whether it’s through tax preparers, commercial tax software such as TurboTax, or with free software available via her department’s website.

The software may have to ask users additional questions, she said, but the answers will flow into the state rather than the federal form. And corporate income taxpayers may encounter additional schedules to account for the differences between state and federal law, she added.

WHAT’S NEXT?

Incoming House Taxes Committee Chairman Paul Marquart said it would be “very difficult and probably not practical” for lawmakers to pass a quick fix in time for Jan. 29, when the IRS and the state start accepting returns, but it might be possible to make some changes retroactive to 2018 and issue refunds.

Bauerly said the choices before lawmakers aren’t as simple as a “yes or no” to incorporating the federal changes because they have budget ramifications.

“You just don’t put a new tax code into place overnight. … Basically the ship has sailed on 2018,” Marquart said.

 

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