This change does not impact 2009 income tax returns for individual taxpayers.

~ Repealing agreement will generate $131 million for Minnesota in FY 10-11~

St. Paul— The State of Minnesota has decided to end its income tax reciprocity program with Wisconsin, effective January 1, 2010. As a result, Minnesota residents who work in Wisconsin will be required to file returns in both states next year.

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. No Minnesota resident will pay more in Minnesota tax, but some who work in Wisconsin will pay more Wisconsin taxes.

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, 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 Minnesota Department of Revenue 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 over the biennium – $43 million in FY 10 and $88 million in FY 11.

“Because of the delay in payments from Wisconsin to Minnesota, this agreement no longer serves the best interests of our state,” said Revenue Commissioner Ward Einess. 

Reciprocity was enacted in 1968 for taxpayer filing simplification and was never intended to reduce taxes for cross-border workers. Technological advances such as electronic filing have significantly reduced the burden of filing since 1968.

Wisconsin residents working in Minnesota

On January 1, 2010, Minnesota will start taxing your personal service income earned in Minnesota such as wages, salaries, tips, commissions, fees, or bonuses.

In most cases, Minnesota employers will withhold Minnesota tax from your pay. You can no longer file Form MWR, Reciprocity Exemption/Affidavit of Residency, to be exempt from having Minnesota tax withheld from your personal service income earned in Minnesota.

For 2009 (with reciprocity agreement), you need to: 

File a 2009 Wisconsin income tax return as you have done in the past. No changes are necessary for your 2009 return because reciprocity is in effect until December 31.

For 2010 (without reciprocity agreement), you need to:

• File a 2010 Minnesota income tax return as a nonresident using Form M1 and Schedule M1NR. Even if you do not meet the minimum filing requirements, you may need to file Form M1 to request a Minnesota tax refund. All personal service income earned in Minnesota is taxable by Minnesota.
• File a 2010 Wisconsin income tax return. You will report all income received on your Wisconsin return, including personal service income earned in Minnesota. You will receive a credit for net income taxes paid to Minnesota on income that is taxable in both states.
• Make 2010 estimated tax payments in Wisconsin if you expect to owe at least $200 in Wisconsin income tax after claiming the credit for income taxes paid to Minnesota. Income tax rates are generally similar in both states. However, you may end up owing Wisconsin tax if you have other types of income that are subject to Wisconsin tax such as dividends, interest or pension income. See Wisconsin Estimated Tax for more information.

Minnesota employer that employs Wisconsin residents

On January 1, 2010, you must begin withholding Minnesota income taxes on personal service income of Wisconsin residents working in Minnesota. Use the Federal Employee's Withholding Allowance Certificate, Form W-4, to determine the amount of Minnesota income tax to be withheld from your employees' paychecks.

If you no longer have a withholding obligation for Wisconsin, you should inactivate your Wisconsin withholding tax account effective December 31, 2009.

Wisconsin employer that employs Minnesota residents

On January 1, 2010, you must begin withholding Wisconsin income taxes on personal service income of Minnesota residents working in Wisconsin. You should ask these employees to complete a Wisconsin Withholding Exemption Certificate, Form WT 4. Form WT 4 is used to determine the amount of Wisconsin income tax to be withheld from employee paychecks.

Resource:  http://www.taxes.state.mn.us/taxes/other_supporting_content/wi_reciprocity.shtml#P53_1654