April 03, 2014

Change in Minnesota State Tax Treatment of Certain Benefits

Last week, the Minnesota Department of Revenue (DOR) released information on changes in Minnesota tax law related to employer-provided educational assistance, adoption assistance and transit benefits. These changes are a result of Governor Mark Dayton's March 21, 2014, signing of a bill that conforms Minnesota tax law with the federal tax-favored treatment of certain benefits permitted under the American Taxpayer Relief Act (ATRA) for tax years 2013 and beyond.

As we detailed in a July 2013 update, last year, the Minnesota Legislature initially decided not to adopt the tax-favored treatment of certain educational assistance, adoption assistance and transit benefits that ATRA allowed at the federal level. This meant that even though such benefits were exempt from federal taxation, employers were required to withhold Minnesota state income tax on such benefits.

However, due to the recent change in law, now certain employer-provided educational assistance, adoption assistance and transit benefits are exempt from state income taxation to the same extent that they are exempt from federal taxation. These changes apply retroactively and are effective for benefits provided during the 2013 tax year.

Change in Law

Specifically, the bill updated the Minnesota Statute's definition of the Internal Revenue Code to include all federal tax law changes made through December 20, 2013. This means that now Minnesota recognizes ATRA's extension of the exclusion from federal income taxation of several benefits that had otherwise been set to expire beginning in 2013. As a result, the following employer-provided benefits are now excluded from income for both state and federal tax purposes:

  • Educational Assistance — Minnesota has adopted ATRA's permanent exclusion of up to $5,250 per year in employer-provided educational benefits under Code §127.
  • Adoption Assistance — Minnesota has also adopted ATRA's permanent exclusion of up to the amount of employer-provided adoption assistance benefits permitted by Code §137 ($12,970 in 2013; $13,190 in 2014).
  • Transit — Minnesota has adopted ATRA's extension through 2013 of the exclusion of up to $245 per month in employer-provided transit benefits. Note that the 2014 limit is currently only $130 per month (due to the failure of Congress to extend a higher limit beyond 2013).

Employer Action

The DOR has provided a bulletin instructing employers to start treating the aforementioned benefits for Minnesota state tax purposes the same way such benefits are currently treated for federal wage and withholding purposes. Employers are also instructed not to adjust for any amounts previously withheld and not to issue corrected 2013 W-2s. Instead, the DOR recommends that employers notify employees of the tax change so that they can complete a new W-4 and/or W-4MN to adjust their withholding allowances for the remainder of the 2014 tax year.

The DOR will attempt to adjust 2013 returns in light of the recent changes and will contact individual taxpayers in the event more information is needed. In certain instances, an individual taxpayer may be required to file an amended return.

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