Live in Wisconsin, Work in Minnesota: Filing State Taxes
Filing state taxes when you live in Wisconsin and work in Minnesota involves a specific process for wages and different rules for other types of income.
Living in Wisconsin and working in Minnesota creates a specific tax situation. Because the two states do not have a tax reciprocity agreement, individuals must navigate a multi-step process to meet their obligations to both states. This involves filing tax returns in both the state of residence and the state of employment. The system is designed to prevent the double taxation of the same income through a tax credit system.
The End of Tax Reciprocity and the Credit System
The long-standing income tax reciprocity agreement between Wisconsin and Minnesota was terminated effective January 1, 2010. Previously, this agreement allowed residents of one state working in the other to file and pay income tax only to their home state. Without this agreement, the default tax rules apply: the state where income is earned has the primary right to tax that income. For a Wisconsin resident, this means wages earned from a Minnesota employer are subject to Minnesota income tax.
To prevent the same income from being taxed at a full rate by both states, Wisconsin provides a tax credit for the income taxes paid to Minnesota. This is not a deduction but a dollar-for-dollar credit that reduces your Wisconsin tax liability. The purpose of the credit is to ensure that you pay a total tax that is effectively the higher of the two states’ rates on that income. This process applies specifically to income earned from personal services, which includes wages, salaries, and commissions.
Managing Your State Tax Withholding
As a Wisconsin resident working in Minnesota, your employer is required to withhold Minnesota income tax from your wages. To ensure the correct amount is withheld, you should provide your employer with a completed Minnesota Form W-4MN, “Minnesota Employee Withholding Allowance/Exemption Certificate.” This form functions similarly to the federal Form W-4 but is specific to Minnesota’s income tax system, allowing you to declare your filing status and number of allowances for state purposes. You can obtain this form from your employer or the Minnesota Department of Revenue website.
Because your employer is withholding Minnesota tax, they will not withhold Wisconsin income tax from your pay. If you anticipate owing $500 or more in Wisconsin income tax for the year, you are required to make quarterly estimated tax payments to the Wisconsin Department of Revenue. This is done using Form 1-ES, “Estimated Income Tax for Individuals,” and prevents a large tax bill and potential underpayment penalties.
How to File Your State Tax Returns
The annual tax filing process for a Wisconsin resident working in Minnesota is a two-step procedure. It requires filing returns in both states to correctly allocate the tax liability and claim the necessary credit.
Your first step is to file a Minnesota nonresident income tax return, Form M1. On this return, you will report only the income you earned from your Minnesota job. You will calculate and pay the Minnesota income tax due on those specific wages. This return establishes the amount of tax you officially paid to Minnesota, a figure that is necessary for your Wisconsin filing.
The second step is to file a Wisconsin resident income tax return, Form 1. On this return, you must report all income you received during the year, regardless of where it was earned, including the wages from your Minnesota employer. To avoid double taxation, you will complete and attach Wisconsin Schedule OS, “Credit for Net Tax Paid to Another State.” You must attach a copy of your completed Minnesota Form M1 to your Wisconsin return as proof of the tax paid.
Tax Treatment of Non-Wage Minnesota Income
The tax rules for non-wage income sourced from Minnesota, such as profits from a business partnership or rental income from a Minnesota property, differ from the reciprocity rules that once governed wages. This type of income is always taxable by Minnesota, regardless of your state of residency. The reciprocity agreement never applied to it, and its termination does not change the fundamental tax treatment of this income.
If you have non-wage income from Minnesota, you must file a Minnesota nonresident return, Form M1, to report that income and pay the associated Minnesota tax. This is a separate requirement from reporting any wages and applies even if you have no Minnesota wage income.
On your Wisconsin resident return, Form 1, you will report this non-wage income along with all your other income. Just as with wages, you can claim a credit for the taxes you paid to Minnesota on this business or rental income by completing Schedule OS. This prevents double taxation and ensures that the income is properly accounted for in both states.