With tax season approaching, so begins the annual hunt for receipts and deductions.
But that may be the least of your worries, warn Minnesota tax experts.
Many accountants said that preparing state returns will be tougher than ever. Some are telling clients to expect to pay hundreds of dollars more than last year to get taxes done.
"We have a substantial mess for tax preparers and for taxpayers," said Geno Fragnito, director of government relations for the Minnesota Society of CPAs.
What's causing all the hubbub is the state's failure to conform its tax code with the massive federal tax change enacted last year. In short, the federal and state tax codes are dramatically out of alignment.
"What I have continuously heard from individuals is that they're anticipating that this filing season will be the most difficult they've seen in their careers. And that's from individuals who have been a CPA for 20, 25, 30-plus years," Fragnito said.
This divergence between state and federal law complicates many matters — especially the choice of whether to take the standard deduction or to itemize expenses that reduce your tax bill.
Usually, it makes sense to do one or the other for both the federal and state returns. Not this year.
One bugaboo is that Minnesota does not recognize the new, higher federal standard deductions of $12,000 for individuals and $24,000 for couples. White Bear Lake CPA Elizabeth Bystrom said that for the purpose of state taxes, it's as if Congress never passed that major tax overhaul last year. "It doesn't exist in Minnesota. There's a lot of people who won't itemize at the federal level. But you might end up itemizing for state purposes while taking the standard deduction for federal purposes," she said.
Bystrom suggests taxpayers make sure they have all the receipts and records that they've traditionally gathered just in case they end up itemizing deductions.
Revenue Commissioner Cynthia Bauerly acknowledged there will be some extra steps and information required from some taxpayers on their state returns.
But she said the state has been rigorously testing tax preparation software and working closely with tax preparation professionals to try to ensure things will go smoothly.
She disagreed that state tax preparation will be more painful this year.
"You are answering some additional questions to make sure we get the right information for your Minnesota return that's not necessary for your federal return," Bauerly said.
The Revenue Department said its website will have all the documents people need to do their state taxes and a list of certified tax preparation software.
The state will also provide a directory of free tax preparation sites for qualifying taxpayers.
Bauerly added that Minnesotans' state income tax bill should not vary much from last year if their finances haven't changed much.
"Minnesota's tax laws have not changed, so your tax implications shouldn't change either," she said.
Bill to prepare taxes may jump
That may be, but taxpayers may wind up paying tax preparers more. Not only is there a chance existing clients may see bigger bills, but CPA Chris Wittich predicted more taxpayers will seek out professional help rather than go it alone.
"There are just so many changes and then all of the new forms that Minnesota has created to handle all of these new differences," he said. "I do think more people will be looking for a CPA to help them prepare their returns."
The potential for CPAs to add to their client lists is substantial. In 2016, just over half of Minnesotans paid an accountant or third party to do their federal taxes, according to the IRS.
And it's fair to assume those preparers did state tax returns, too.
According to that 2016 IRS data:
• The more money people made, the more often they used a paid tax preparer. Sixty-two percent of filers with adjusted gross incomes of $75,000 or more used a paid preparer. That excluded software preparation services such as TurboTax.
• About one-third of Minnesota tax filers itemized deductions on their federal returns in 2016.
• About three-quarters of filers with adjusted gross incomes of $75,000 or more itemized deductions.
Wittich believes that anyone with a business will especially need a tax adviser.
"There's a fair bit of new complexity related to that. And I think that's driving a lot of people to come and to come and talk with me now because certainly for businesses things have not gotten more simple," Wittich said.
There may be something to gain from this year's tax pain, said Mark Haveman, executive director of the Minnesota Center for Fiscal Excellence. He said he hopes the tax complexities will create a strong push to make state taxes simpler and easier to comply with.
"I think the realities of 2018 filing are going to bring that more to the forefront for taxpayers and therefore for legislators as well," he said.
Meanwhile, Haveman said he pities people who attempt to do state taxes on their own.
"Godspeed to everyone who tries to do it by themselves. It's going to be a challenge," he said.
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