Every year there are tax rules that change for federal purposes and sometimes Minnesota adopts those changes; sometimes they don’t. This year there is a longer than usual list of items that Minnesota does not conform to for individual taxpayers. Often these items are small and obscure and don’t have a huge dollar amount attached to them. This year, one item in particular is going to be a rude realization for some Minnesota taxpayers.
On your federal return you can exclude debt forgiveness income related to your personal residence. In the past you could also exclude that on your Minnesota return, but not this year. Minnesota has not adopted the federal provisions that allow taxpayers to exclude principal residence debt forgiveness.
Practically speaking this means people with foreclosed homes are going to have a big tax liability in Minnesota which will certainly come as a big surprise to most. For example, if a single taxpayer has $60,000 of income with a home foreclosure that results in $100,000 of debt forgiveness, they won’t pay any extra federal tax on the debt forgiveness, but they will have about $7,500 of Minnesota tax on that $100,000 of debt forgiveness income. Taxpayers in that situation with a home foreclosure probably don’t have $7,500 of cash lying around to give to the state of Minnesota, so it’s going to create some tough tax situations where people already have tough economic situations.
I don’t normally comment on the merits of tax policy. Everyone has their own opinion on whether taxes are too high or too low, but I think everyone can agree this one item of nonconformity is just not good policy. Hopefully the state will address this item, but for now it will be quite a surprise for taxpayers with home foreclosures.