Free online Minnesota income tax filing? The state is looking into it

Minnesotans might one day be able to ditch paper tax forms and the sometimes costly filing software from private companies.

Legislators tucked more than $5 million into a massive $3 billion tax package signed into law to potentially develop a free online tool for Minnesotans to fill out their state income taxes. The proposal, which circulated at the Capitol for years, was given a late-session boost by the Internal Revenue Service, which announced its own pilot project to explore free online tax filling at the federal level.

"If we're asking for people to pay their taxes we should make it as easy as possible," said state Rep. Cheryl Youakim, DFL-Hopkins, who has carried the bill for years.

The new law requires the Department of Revenue to survey different tax preparation software vendors about developing a system, including security concerns and potential customer service costs to the state. A report is due to the Legislature in January.

It also puts $5 million of one-time money into a new account to "modernize the state process for filing individual income tax returns," including the development and implementation of free state filing options for the individual income tax. The money must be used before July 1, 2027.

Currently, Minnesotans can fill out paper forms provided by the state to file their individual income taxes each year, or they can pay a private company to use online tax filing software.

It costs up to $129 to do your own taxes using TurboTax software, and as much as $409 for the company to do your taxes for you. Some people qualify for free electronic filing, depending on their income level.

More than two million Minnesota taxpayers used electronic software to file their taxes in 2022, according to the Department of Revenue.

"It's actually more secure than sending paper in through the mail," Youakim said. "It also enables folks to catch their mistakes if the system is intuitive."

What happens in Minnesota will depend on the success of the federal pilot, Youakim said.

The IRS has said its program will be offered to a limited number of people next year to gather information on creating a free online system for federal tax forms. But it could be a few years before such a program is up and running, and the government expects intense pushback from private tax filing companies.

Youakim said research into a free federal program has shown that some people wouldn't use it if it couldn't do their state taxes too, so exploring a state program makes sense.

Department of Revenue Commissioner Paul Marquart said he's already had discussions with the IRS about its pilot project and the need to be in constant communication with the state as the federal agency moves forward with any changes.

"We want to make sure that whatever the IRS does, especially if they go to a full free online tax filing system, that we're able to link up to the system so we are able to provide a seamless experience for taxpayers," he said.

"Our tax system is based on voluntary compliance," he added. "We always want to make it easy as possible for people to file their taxes."