2017 Minnesota Tax Law Changes
As part of the Omnibus Tax Bill passed by the Minnesota State Legislature during the 2017 Special Session and signed into law by Governor Dayton, the Minnesota Estate Tax Exclusions have been retroactively increased for Estates of Decedents dying after December 31, 2016 to the following:
- $2,100,000 (for decedents passing away in 2017)
- $2,400,000 (for decedents passing away in 2018)
- $2,700,000 (for decedents passing away in 2019)
- $3,000,000 (for decedents passing away in 2020)
Prior to this enactment, the exclusion had been $1,800,000 (2017) and $2,000,000 (2018+).
In addition to the increased Estate Tax Exemptions, the Omnibus Tax Bill added to the State’s definition of what cannot be considered when considering residency, introduced accelerated gain treatment on installment sales by nonresidents and created some additional subtractions and new credits that will impact Minnesota taxpayers. Below are some of the highlights:
Determination of domicile. Effective for tax years beginning after 2016, in addition to the location of where a charitable contribution is made, neither Minnesota Revenue nor any court can consider the location of an individual’s attorney, certified public accountant, or financial advisor, or the place of business of a financial institution at which the individual applies for any new type of credit or at which the individual opens or maintains any type of account when determining where an individual is domiciled (permanent residency).
Accelerated recognition of certain installment sale gains. Effective for tax years beginning after 2016, a nonresident or a person who becomes a nonresident during the tax year that sells the assets of, or any interest in, an S corporation or partnership that operated in Minnesota during the year of sale must recognize the entire gain in the year of sale even if they are reporting under the installment sale method under the Internal Revenue Code. If a taxpayer begins the sale as a Minnesota taxpayer and leaves the state in any year after the initial installment sale, the remaining gain must be recognized on that taxpayer’s final Minnesota resident tax return.
A nonresident can elect out of this treatment by making an election with their tax return to file Minnesota returns in years in which the gain is recognized for federal purposes.
Subtraction for contributions to a Section 529 plan. Effective for tax years beginning after 2016, the legislation allows personal income taxpayers to subtract up to $1,500 ($3,000 for married joint filers) of contributions to any state’s Section 529 college savings plan or prepaid tuition plan. The subtraction excludes amounts that are rolled-over from other college savings plans and is limited to taxpayers who do not claim the new Section 529 savings plan credit.
Subtraction for discharge of indebtedness; education loans. Effective for tax years beginning after 2016, the bill allows an income subtraction for student loan indebtedness discharged by the lender following the borrower’s completion of an income-driven repayment plan that sets monthly payments based on the borrower’s income and family size. Qualified repayment plans include the income-based repayment plan, the income-contingent repayment plan, and the PAYE and REPAYE programs..
First-time home buyer accounts. A subtraction for earnings on a first-time home buyer account is allowed against personal income tax for tax years beginning after 2016. The legislation also provides an addition to federal taxable income for distributions from a first-time home buyer account that are not used for an eligible purpose or amounts remaining in an account at the end of the tenth taxable year after the account was opened, effective for tax years beginning after 2016. The addition is subject to Minnesota income tax as well as an additional tax of 10%.
Subtraction for social security benefits. For tax years beginning after 2016, a portion of Social Security benefits is allowed as a subtraction. The maximum subtraction is $4,500 for married couples filing joint returns, $3,500 for single and head of household filers, and $2,250 for married couples filing separate returns. The subtraction is reduced by 20% of provisional income over $77,000 (married couples filing joint returns), $60,200 (single and head of household files) and $38,500 (married couples filing separate returns). “Provisional income” is defined as modified adjusted gross income (federal adjusted gross income before the subtractions for student loan interest, higher education tuition expenses, and domestic manufacturing expenses, less Social Security benefits, plus tax-exempt bond interest) plus one-half of Social Security benefits.
Dependent care credit. Effective for tax years beginning after 2016, the Minnesota dependent care credit has been increased to equal the federal credit for taxpayers with adjusted gross income up to $50,000.
Working family credit. Minnesota has expanded the working family credit to include individuals ages 21+ who don’t have qualifying children, effective for taxable years beginning after tax year 2018.
Research credit. Effective for tax years beginning after 2016, the second tier rate is increased from 2.5% to 4% on qualified research expenses for the taxable year over the base amount.
Student loan credit. A maximum income tax credit of $500 is allowed for eligible loan payments (principal and interest payments on higher education loans) paid during the year on a qualified education loan, effective for tax years beginning after 2016.
Section 529 college savings plan credit. Beginning in tax years after 2016, a maximum income tax credit of 50% of the contributions (up to a maximum of $500) is available for contributions to any state’s Section 529 college savings plan, including prepaid tuition plans. For individual filers, the maximum credit is phased out by 2% of adjusted gross income in excess of $75,000 (fully phased out at $100,000 of adjusted gross income (AGI)). For married couples filing joint returns, the maximum credit is phased out by 1% of AGI ($75,000-$100,000), with a maximum credit of $250 for AGI from $100,000-$135,000 and then is phased out again by 1% of AGI in excess of $135,000 (fully phased out at $160,000 of AGI).
If you have any questions about the updated Minnesota tax law or any other tax questions, please contact our office at (952)476-7100.