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Last Updated: 1/31/2017

Expenses Related to Income Not Taxed by Minnesota

Minnesota does not allow deductions for expenses related to income that isn’t taxed by the state. These expenses may include legal fees and miscellaneous expenses paid to collect Railroad Retirement Board pension payments or income for an American Indian living on a reservation.

If you deducted such expenses on Schedule A of your federal return:

  • You must add back the deductions to taxable income on your Minnesota return, as a direct expense or a flow-through item from a partnership or S corporation.
  • If an expense is associated with both taxable and nontaxable income, you must make a reasonable effort to divide and distribute the expense.
 

U.S. bond expenses

Do not report deductions for any expenses related to income from U.S. bonds on Schedule M1M. These expenses may include interest on a loan to purchase federal bonds, brokerage fees to purchase bonds or shares of a U.S. bond mutual fund, or fees for a safe deposit box used to store federal bonds.
 
U.S. bond income is taxable at the federal level but not at the state level. For Minnesota purposes, this income is reported on  Form M1, Individual Income Tax. Therefore, any deductions for related expenses should be subtracted from the amount on Form M1, rather than reported separately.
 
Example: Ben purchases U.S. bonds from his broker and pays a commission of $150, which he deducts on Schedule A of his federal return. He reports $2,000 of U.S. bond interest income on his federal return. On his Minnesota return, Ben subtracts the $150 expense from his $2,000 of bond income and lists $1,850 on Form M1.
 
View the statute (M.S. 290.0131, subdivision 12) .