Free File Report to Legislature: The tax bill directed Revenue to survey tax software providers and report on free electronic options to prepare and file state income tax returns. Read our report, Free File Options for Minnesota: A Summary of Research and Recommendations.
Conformity to Internal Revenue Code
The tax bill updates state tax law conformity to the Internal Revenue Code (through May 1, 2023) and includes the SECURE Act 2.0. Visit 2023 Federal Conformity for Income Tax for more details.
Net Investment Tax
The bill enacted a new tax on net investment income, starting in tax year 2024. Net investment income includes but is not limited to interest, dividends, capital gains, rental and royalty income, and other similar income. It is reduced by certain deductions, like investment interest expenses, investment advisory and brokerage fees, and similar expenses.
This new tax is imposed on individuals, estates, and trusts with more than $1 million of net investment income in the tax year. The tax rate is 1% on the net investment income over $1 million.
Public Pension Income Subtraction
This bill provides for a subtraction for certain qualified public pension income, effective for tax years 2023 and later. Recipients or survivors may qualify for a subtraction if all of these apply:
- They earned public pension income.
- They did not earn credit toward Social Security benefits on this income.
- They are ineligible to receive Social Security benefits for the same service.
The subtraction amount is limited to:
- $25,000 for a married taxpayer filing a joint return or a surviving spouse
- $12,500 for all other filers
The subtraction phases out at these income thresholds, reducing it by 10% for each $2,000 of adjusted gross income exceeding the threshold:
- $100,000 for a married taxpayer filing a joint return or a surviving spouse
- $78,000 for a single or head of household taxpayer
Sexual Harassment or Abuse Settlements
The tax bill included two provisions related to sexual harassment or abuse settlements between an employer and an employee.
First, when there is a financial settlement provided, the financial settlement cannot be provided as wages or severance pay to the employee regardless of whether the settlement includes a nondisclosure agreement.
Second, an income tax subtraction is provided related to damages received for nonphysical injuries and sicknesses, such as emotional distress, humiliation, and defamation, as a result of an abuse claim.
Social Security Income Subtraction
The bill expanded Minnesota’s Social Security subtraction to allow taxpayers to subtract the greater of a new Simplified Method of calculating the subtraction or an Alternative Method (similar to the subtraction as calculated under prior law).
The new Simplified Method allows taxpayers with adjusted gross income (AGI) below $100,000 for married joint returns — or $78,000 for single or head of household returns — to subtract all taxable Social Security benefits. The subtraction phases out by 10% for each $4,000 of AGI , or fraction thereof, over these thresholds. For married taxpayers filing separately, the phase-out is 10% for each $2,000 of AGI over $50,000.
The thresholds are indexed to inflation. Taxpayers can use the Alternative Method to calculate the subtraction amounts similar to prior law, if doing so results in a larger subtraction than the Simplified Method.
The effective date is tax year 2023 and later.
Standard and Itemized Deduction Limitation Changes
Filers with incomes over $220,650 will generally see fewer tax benefits from the standard or itemized deductions. For those with AGI more than $220,650, the reduction is the lesser of:
- 80% of the amount of the deductions
- 3% of AGI between $220,650 and $304,970, plus 10% of AGI greater than $304,970.
Those with adjusted gross incomes (AGI) greater than $1 million will have deductions reduced 80%, rather than using the calculation above.
These changes are effective for taxable years beginning after December 31, 2022.
Student Loan Discharge
The American Rescue Plan Act of 2021 (ARPA) allowed a broad exclusion from gross income for discharged student debt, effective for tax years 2021 to 2025. This bill adds the ARPA exclusion for discharged student loans beyond the timeframe covered by ARPA.
Unemployment Compensation Subtraction
This new subtraction for unemployment compensation affects a small population of teenagers and high school students who were initially denied unemployment benefits in 2020, but later received them in 2021 as a result of the Minnesota Court of Appeals decision.
Since the previous subtraction for unemployment benefits only applied to benefits received in 2020, these individuals did not qualify. This subtraction is only for recipients affected by the ruling.
Taxpayer Receipt
The bill provides for an “interactive taxpayer receipt,” which will show the share of the state general fund represented by each expenditure category. Once complete, the receipt tool will allow a taxpayer to input their income amount and will provide an estimate of the amount of major state taxes paid by that individual taxpayer. It is anticipated that the receipt tool will be available for use on the Department of Management and Budget’s website.
Withholding Rate for Pensions and Annuities
The bill establishes a withholding rate of 6.25% (or a rate directed by the recipient) for periodic payments and nonperiodic distributions from retirement accounts such as annuities or IRA distributions on demand.
