Every year, state lawmakers decide which federal tax laws Minnesota is going to comply with, and this year, there's a big one with which they don't see eye-to-eye with Congress. For some taxpayers, it's simply adding insult to injury.
For Bill Germscheid, it's bad enough he lost his job.
"It hurts us because if we'd known we'd be stuck with a big tax bill. It makes us think, ‘Why did we sell in the first place?'"
In addition, he had to sell his townhouse in Shakopee for more than $50,000 less than he bought it for, and now he's on the hook for several thousand dollars in state taxes to boot.
"It took us as a big surprise. We knew we probably owed some money but the $5,000 we owe is really kicking us in the pants," he said.
For the past few years, Congress has given tax breaks to homeowners who either had their homes foreclosed on or sold their homes for less than they owed on their mortgage which are called "short sales."
However, for the first time, Minnesota isn't going along with that portion of federal tax law, leaving thousands of Minnesotans with an unexpected expense come tax time.
"It hasn't been well publicized so taxpayers just don't know and they are going to have a rude awakening when they go to their accountant to do their tax return. It's like, ‘Whoa, I didn't see this coming,'" CPA Chris Wittich said.
For example, if you owed $200,000 on your mortgage and the bank let you sell your house for $150,000, you'd have to count the $50,000 dollars of debt the bank forgave on your mortgage as taxable income.
With the state tax rate anywhere from 8 to 10 percent, you would have to pay up to $5,000 more in income taxes you probably don't have.
"It's going to be a real burden on those taxpayers to have a Minnesota tax that they have to pay," Wittich said.
Germscheid and his new bride will be pinching pennies to come up with the additional money for their tax bill, but he hopes the state legislature will come around before it's too late.
"It's really hurting us because we want to start a family. That money could be used elsewhere to pay off other debts that accrued when I was out of work," he said.
State lawmakers could retroactively comply with Congress on the debt forgiveness tax when they convene next month. In fact, Rep. Ann Lenczewscki plans to introduce a bill that would do just that on Friday.