Recent MN Tax Changes – Why You Received a Refund from MN

/ June 16, 2014

Taxes and Constitutuion - iStockIf you are like me, you recently received a second tax refund from the State of Minnesota. Right before that, you also received a letter explaining that you were about to receive the refund and what it was for. If you are not up to speed with the latest Minnesota tax law, you may not know why you received that refund. And because you received a refund, versus a bill, you probably didn’t spend the time to figure out exactly why you received the refund.

Here’s Why

The reason you received the latest refund from Minnesota is likely a result of the Minnesota tax law changes that occurred on March 21st of this year. Minnesota passed a bill extending certain tax provisions allowed at the Federal level that were not previously allowed for Minnesota tax purposes.

Thankfully, this was one surprise that most taxpayers were happy about. We had been told for a full year that deductions were not allowed for these certain items for Minnesota tax purposes. Given the tax rate increase and the budget issues the state was having at the time, we expected it to stay that way. So, when we received the news that there was a taxpayer friendly change late in the tax season, we were thrilled.

When the news broke that Minnesota had passed this bill, we were told to hold off on filing amended returns. Rather, the state would determine the changes within their system and automatically correct the calculation. You are now seeing the difference in the calculation of the tax by virtue of the refund.

But back to why you received the refund in the first place. Before the bill was passed, Minnesota had decoupled from Federal tax treatment for certain items. Meaning, although you are allowed a deduction at the Federal level for an item, a state will not allow that same deduction for calculation of their tax. It seems devious, but it is normal. Each state is entitled to determine what deductions are allowed in calculating tax for their jurisdiction.

Deductible Items

If you received a refund, take a look at the tax return you originally filed this year. You will likely find that you had a deduction for one or more of the following items, which now qualify for the new state tax breaks:

  • Mortgage insurance premiums
  • Student loan interest
  • Higher education tuition deduction
  • Employer provided tuition assistance
  • Qualified charitable distributions directly from IRA accounts
  • Employer provided adoption assistance
  • Employer provided transit assistance
  • Educator out of pocket expenses

Also included in the bill discussed above are changes to the tax code for 2014. Probably the most publicized is the ‘fixing’ of the marriage penalty and larger child care credits available for 2014.

Finally, there were also changes made to the estate & gift tax rules. But I won’t bore you with the mundane details.   Not because I don’t want to, but because Jamie Held wrote about these changes in her post, Changes to Minnesota’s Estate & Gift Tax, on March 27th. You can find that article here.

If you have any questions about the tax refund or need any further tax advice, be sure to contact an accountant for help.