Federal Update Legislation
Minnesota has adopted all of the Internal Revenue Code (IRC) changes made to “federal taxable income” from March 18, 2010, through April 14, 2011, effective the same date as the federal changes.
Even though all the changes were adopted for the definition of federal taxable income — which is the starting point on the Minnesota return — the following modifications are added to federal taxable income to arrive at Minnesota taxable income (appropriate lines will be added to Schedule M1M, Income Additions and Subtractions):
- The increase in the federal standard deduction for married taxpayers — If you took the standard deduction on your federal return and are filing: (1) married filing joint or qualifying widow(er), you will be required to add back $1,950; or (2) filing married filing separate, you will be required to add back $975.
- The federal removal of the limitation on itemized deductions — Taxpayers with an adjusted gross income that exceeds the applicable threshold (e.g., $84,775 for married filing separate or $169,550 for all other filers) will be required to add back the amount that would have been limited under prior federal law for itemized deductions.
- The federal removal of the phase out of personal and dependent exemptions — Taxpayers with an adjusted gross income that exceeds the applicable threshold (e.g., $254,350 for married filing joint; $211,950 for heads of household; $169,550 for single; and $127,175 for married filing separate) will be required to add back the amounts that would have been phased out when determining personal exemptions under prior federal law.
In addition, several modifications that Minnesota did not conform to in the past were fully adopted or no longer apply at the federal level, beginning with tax year 2011. As a result, the following lines will be removed from the 2011 Schedule M1M:
- The additional standard deduction for real estate taxes and/or motor vehicle sales tax;
- Excluded unemployment compensation;
- The educator expenses and college tuition and fees deduction (Minnesota adopted this provision permanently going forward from 2010); and
- Discharge of indebtedness income addition.
- Important note: Minnesota continues to require an 80 percent addback for bonus depreciation and section 179 expensing.
Filing Requirements for Active Duty Military Members
Minnesota residents are allowed to exclude active duty military pay for services performed in Minnesota when determining if they meet the Minnesota individual income tax filing requirement, effective for tax years beginning after Dec. 31, 2010. Previous law allowed only active duty military pay for services performed outside Minnesota to be excluded when determining the filing requirement.
Working Family Credit Phase Out
The 2011 Working Family Credit table will include an additional $5,000 income phase-out level for married filing joint filers. The increase coincides with a similar increase in the phase out of the federal Earned Income Credit.
Note: The $5,000 additional phase out also applies to 2012 for federal tax purposes; however, Minnesota did not adopt the change for 2012.
Wisconsin/Minnesota Income Tax Reciprocity Benchmark Study
The Minnesota Department of Revenue has been directed to conduct an income tax reciprocity benchmark study to be completed March 1, 2013. To help us gather the necessary information, Minnesota and Wisconsin residents who work in the other state will be required to provide additional information when completing their 2011 Form M1, Individual Income Tax Return.
To allow room on the Form M1 for the additional information, the U.S. bond interest subtraction and the K-12 education subtraction lines were moved from the M1 and are now reported on Schedule M1M.
Although the income tax reciprocity agreement with Wisconsin has been terminated, the Minnesota Department of Revenue is exploring the possibility of a new agreement.
Net Operating Losses (NOL)
In 2010, Minnesota did not adopt the five-year NOL carryback provision of the federal Worker, Homeownership and Business Assistance Act of 2009. Individuals choosing this federal option are limited on the Minnesota return to a carryback period of two years preceding the loss. The unused portion of the loss is allowed to be carried forward for up to 20 years.
Legislation enacted in 2011 — effective retroactively for losses generated in taxable years beginning after Dec. 31, 2007 — now allows individuals to:
- claim the NOL losses when calculating their nonresident/part-year resident ratio on Schedule M1NR; and
- fully claim the benefits related to the NOL losses when determining alternative minimum tax on Schedule M1MT.
For additional information, see NOL carryover examples for 2008 and 2009.
Political Contribution Refund Suspended Another Two Years
The Political Contribution Refund does not apply to contributions made after June 30, 2009, and before July 1, 2013, effective retroactively from July 1, 2011. Previous law allowed refunds based on contributions made after July 1, 2011.
Note: Changes for Future Years
The nonrefundable income tax credit for new participants in a section 125 employer health insurance plan has been repealed, effective for tax years beginning after Dec. 31, 2011. As a result, Schedules M1H and M1H-a will become obsolete beginning in 2012.
Beginning 2013, taxpayers will no longer be able to exclude from federal adjusted gross income the amount of the federal subsidy for prescription drug plans allowed under IRC 139A. As a result, the Minnesota addition will no longer be necessary.
Continue to check this web page for updates.
Date posted: Sept. 12, 2011