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Last Updated: 4/24/2018

Expenses Related to Income Not Taxed by Minnesota

Minnesota does not allow deductions for expenses related to income that the state does not tax. 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.

What if I deducted these expenses on my federal Schedule A?

You must add back the deductions to your Minnesota taxable income, as a direct expense or as 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.

Report the expenses on Schedule M1M, Income Additions and Subtractions.

Do I report expenses related to income from U.S. bonds on Schedule M1M?

No. Do not report these expenses, including any of the following:

  • Interest on a loan to purchase federal bonds
  • Brokerage fees to purchase bonds or shares of a U.S. bond mutual fund
  • 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. You may subtract U.S. bond interest from your Minnesota taxable income on Schedule M1M (see Net Interest from U.S. Bonds Subtraction). However, you must reduce your subtraction by any deductions on your federal return for expenses related to this income. See the example below.

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.

For more information, see Minnesota Statute 290.0131, subdivision 12.