Minnesota Ends Tax Reciprocity with Wisconsin

The Minnesota Department of Revenue has announced that the state will end its income tax reciprocity agreement with Wisconsin effective Jaunary 1, 2010.

As a result, Minnesota residents who work in Wisconsin will be required to file returns in both states next year. The termination of reciprocity does not impact the 2009 income tax returns that taxpayers will be filing in early 2010. The Department has also issued guidance on what Minnesota and Wisconsin residents must do starting January 1. (Department of Revenue Press Release. 09{18/2009; Department of Revenue Notice, 09/22/2009.)

Why the agreement was ended

The Department says that termination of the reciprocity agreement will impact about 13,000 Minnesotans and 33,500 Wisconsin residents who meet the filing requirements and work across the border. Because there are more than twice as many Wisconsin residents who work in Minnesota, Wisconsin reimburses the State of Minnesota for the income tax it collects from Minnesota workers. However, the payments are made about 17 months after the taxes are collected. In June, Minnesota Governor Pawlenty announced a plan to receive more timely reimbursements from Wisconsin to help balance the budget, but the two states have been unable to reach agreement on a modified timetable. As a result, the Department is terminating the program, and the reciprocity provisions will no longer apply to cross-border workers for income earned beginning January 1, 2010. Repealing the agreement will generate an estimated $131 million in revenue for Minnesota over the biennium-$43 million in Fiscal Year 2010 and $88 million in Fiscal Year 2011.

Minnesota residents working in Wisconsin

Beginning January 1, 2010, Wisconsin will start taxing the personal service income of Minnesota residents-such as wages, salaries, tips, commissions, fees, bonuses-earned in Wisconsin. In most cases, Wisconsin employers will withhold Wisconsin tax from the pay of Minnesota residents. If a Minnesota resident meets the minimum filing requirements, he or she will need to file a 2010 Wisconsin income tax return (the Wisconsin Department of Revenue should be contacted for additional information). That same income will be subject to Minnesota tax. However, when filing a Minnesota Form M1, Minnesota residents will be allowed a credit for taxes paid on their Wisconsin return.

Minnesota tax rates are generally similar to Wisconsin's tax rates. However, a taxpayer may end up owing Minnesota tax if the taxpayer has other types of income—such as dividends, interest or pension income—that are subject to Minnesota tax. If a taxpayer expects to owe $500 or more after claiming the credit for taxes paid to another state, the taxpayer is required to pay Minnesota estimated tax.

Wisconsin residents working in Minnesota

Beginning January 1, 2010, Wisconsin residents will be subject to Minnesota tax on personal service income—such as wages, salaries, tips, commissions, fees, bonuses—that they earned in Minnesota. In most cases, Minnesota employers will withhold Minnesota tax from the pay of Wisconsin residents. A Wisconsin resident can no longer file Form MWR (Reciprocity Exemption/Affidavit of Residency), to be exempt from having Minnesota tax withheld from personal service income earned in Minnesota.

If a Wisconsin resident meets the minimum filing requirements, he or she will be required to file a 2010 Minnesota return and Schedule M1NR as a nonresident. Even if a Wisconsin resident does not meet the filing requirements, he or she may need to file Form Ml to request a Minnesota tax refund. A Wisconsin resident working in Minnesota may also have to file and pay taxes to Wisconsin on personal service income he or she earned in Minnesota. Generally, a Wisconsin resident can claim a credit on his or her Wisconsin return for the taxes paid to Minnesota on the same income that is taxed by both states. Taxpayers should contact the Wisconsin Department of Revenue for additional information.

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