New tax bites on the way for certain Minnesotans

If your employer is helping to pay for your education or an adoption, expect a bigger tax bill in the near future.

This year, the state will tax certain employer benefits such as tuition assistance and adoption subsidies.

Tuition and adoption assistance are on a laundry list of tax breaks that are disappearing from Minnesota's tax code, even though they are still available under federal tax law.

For instance, if you've recently been in foreclosure, the state may tax you. That's because many people technically receive income when their lender sells the house for less than is owed on the mortgage. The state will tax that "income," but the federal government won't.

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Minnesotans will no longer be able to deduct certain student loan interest payments.

Others will miss out on a mortgage insurance premium write-off.

The reason? A largely under-the-radar political debate during the last legislative session that pitted Democrat against Democrat.

The federal tax code typically gives things like employer tuition assistance special treatment. Every year, Congress renews these exemptions and write-offs. In early 2013, the federal government made them permanent.

Typically, Minnesota conforms to federal law. But this year, the Legislature didn't square the state and federal tax codes.

State Rep. Ann Lenczewski, who chairs the House tax committee, said she wanted to make sure Minnesotans weren't hit with unexpected taxes this year, so the House tax bill included language that would erase differences between state and federal taxes.

"It's a convenience and simplicity for the tax filer," said Lenczewski, DFL-Bloomington.

Those tax breaks are also worth a lot of money. Keeping those policies in place would cost the state about $300 million over two years, according to the Minnesota Department of Revenue. Lenczewski proposed paying for them by adjusting the state's income tax brackets to collect more revenue. She said her plan would have ultimately resulted in a net tax cut.

But Lenczewski said she met with resistance from the Senate and from Gov. Mark Dayton's office. Ultimately, the provisions were dropped before the latest tax bill was put on the books.

Paying for those tax breaks costs too much money said state Sen. Rod Skoe, chair of the Senate tax committee.

"Things got left out because it takes dollars to pay for those conformity issues most of the time," said Skoe, DFL-Clearbrook. "We started with a deficit. People now are concerned about the revenue that we did raise through tax increases. There would have been more tax increases if we had conformed with everything."

But the Legislature is raising taxes for certain people, in this case by omission rather than legislation.

In a perfect world, Skoe said, the state and federal tax code would match. He said he plans to work on the issue in the future.

Dayton's supplemental budget included a few federal tax breaks, but not all of them because it was going to cost the state a lot of money, said Matt Swenson, a spokesman for the governor.

When state and federal tax rules are different, it not only creates headaches for consumers but also for employers, said Tim Goodman, an attorney who specializes in employee benefits. Goodman, a partner with Dorsey & Whitney in Minneapolis, said many of his clients who offer tuition and adoption assistance will have to take the taxes out of their employees' paychecks in a lump sum later in the year.

"Payroll systems are enormously complex and it's very difficult to reprogram them," he said. "Especially when the federal tax rules are different from the state tax rules, it takes extra time and effort to make sure things are being done correctly."

Politically speaking, it doesn't look good when the state taxes something but the federal government doesn't, Lenczewski said.

"You're like, 'what?!' who are these Minnesota legislators who took away my tax benefit that Congress just gave me," she said. Normally, "you don't see people play politics with federal conformity."