Minnesotans face higher taxes with gap between state, federal codes

  • Article by: JENNIFER BROOKS , Star Tribune
  • Updated: September 23, 2013 - 4:41 PM

Many Minnesotans will be pinched next year because the Legislature failed to keep up with tweaks to federal code.

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Brenda Scandin will owe a big state tax bill over a short sale on her house because a federal tax break no longer applies.

Photo: Glen Stubbe • gstubbe@startribune.com,

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Minnesotans who lost their homes this year could lose even more when they sit down to pay their 2013 state taxes.

Dozens of federal tax breaks no longer exist in Minnesota. New parents face a state tax bill for the money they got from their employers to help with adoption expenses. Homeowners who went through a foreclosure or short sale or who refinanced their mortgages in 2013 will be taxed by the state — but not the federal government — on that discharged debt.

Congress pushed through a raft of tax breaks and extensions early this year, but the Minnesota Legislature did not follow suit. That has opened gaps where state tax law does not line up with the federal tax code. Those small differences on tax returns may cost some Minnesotans dearly — people like Brenda Scandin, who lost her home to a short sale this year.

“How can they tax people who have lost their homes?” asked Scandin, whose $600,000 lakefront home in Mound sold for $200,000 this spring.

Scandin learned about the tax changes in an e-mail from the Minnesota Department of Revenue, alerting her to changes in the tax code. She now owes state taxes on the $300,000 or so in mortgage debt the bank forgave. She expects that tax bill to amount to tens of thousands of dollars.

 

“I was horrified,” said Scandin, who says she and her husband emptied their retirement accounts in a frantic race to keep up mortgage payments on their home after she lost her job as a corporate comptroller during the recession.

Scandin has since retrained and works as a real estate agent, helping other families find their homes even as she was slowly losing her own. “I just can’t grasp the concept of being taxed on money you never received,” she said.

If Scandin’s short sale had gone through last year, she would not be facing this tax bill. During the height of the housing market collapse, Congress passed the Mortgage Forgiveness Debt Relief Act, which allowed homeowners to write off up to $2 million of the debt on that primary residence.

Those mortgage forgiveness tax breaks were set to expire this year, but Congress passed a one-year extension, through the end of this year, along with dozens of similar breaks and extensions packaged in the American Taxpayers Relief Act of 2012.

Every time Congress tweaks the tax code, states must decide whether to bring their own tax codes into conformity or leave taxpayers to navigate the difference between their state and federal filings.

The Minnesota House passed a conformity bill this year, but the Senate did not. Ultimately, a handful of minor proposals were signed into law by Gov. Mark Dayton.

Dayton now says there may be something the state can do to help people like Scandin and other Minnesotans who slipped through the cracks.

“Anybody who’s had the misfortune of having to sell a $600,000 home for $200,000 certainly shouldn’t have to pay taxes on a paper loss that’s somehow counted as income,” he said. “I’m very willing to look at what we can do the next legislative session to retroactively exclude that income from state taxation.”

‘One man’s loophole …’

Implementing every tax break included in the federal Taxpayer’s Relief Act of 2012 would cost Minnesota $300 million over the next two years. Mixed in with tax breaks for adoptive parents, students, charitable donors and people struggling with mortgage debt are breaks for things like “motor sports racing facilities” and expense forms for film and television productions.

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