Minnesota Tax Law Update

The flurry of tax law changes over the last few years has been nothing short of a whirlwind, leaving many of us with whiplash as we make sense of all the proposed changes and changes to the proposed changes. Now is the perfect time to reflect on some of the changes from the 2021 tax season and discuss the latest updates Minnesota has proposed for the 2022 tax season.

Passthrough Entity Tax (PTE)

You may have received a phone call from your tax professional last November or December recommending that you make a “PTE Payment” by December 31st. We may not have been able to explain in detail why Minnesota decided to pass this law or exactly how it worked, but we knew it was beneficial for business owners to make this payment. And we knew it had to be done in 2021 to provide the benefit. So, tax professionals advised their clients to “just make the payment, and we will explain it later.” Well, this is now “later”!

The 2018 federal tax law change limited the deduction for taxes on personal income tax returns to $10,000. Thus, if you paid $30,000 in Minnesota individual income tax, you would only receive a deduction for $10,000 on your federal return and receive no tax benefit for the other $20,000. In addition, if you take the standard deduction instead of itemizing, you do not receive a benefit.

The PTE election allows Partnerships and S corporations to elect to be taxed by Minnesota at the entity level. At the entity level, there is no $10,000 limitation on the tax deduction. So, in the above example, the entity would deduct the full $30,000 and the income shown on your K-1 would be reduced by $30,000. By making the PTE election and having the Partnership or S corporation bear the tax burden, you receive the full tax benefit of the taxes paid to Minnesota.

There are many rules not discussed here around making this election, so be sure to consult with your BGM tax advisor to see if it fits you and your Partnership or S corporation.

Minnesota Proposed Tax Law Changes

In May 2022, it looked like a sure thing that Minnesota lawmakers were going to agree on a bill that was highlighted by historic tax cuts. As things tend to do, negotiations fell apart at the last minute, and a deal was not agreed upon. The framework was set for what could be included in a future agreed-upon bill.

Below are some of the highlights that were in the bill:

• Social Security Tax Eliminated: Currently, Social Security benefits are taxed by the federal government and Minnesota, depending on a taxpayer’s overall income. Only 13 states collect taxes on Social Security, though Minnesota and many others exempt people at lower income levels. Republicans and some Democrats had pushed for repealing the state’s Social Security tax by saying it would help seniors and remove one of the reasons retirees flee Minnesota.
• Reduction in the Lowest Income Tax Tier: Another tax cut in the proposed bill was a reduction in the lowest income tax tier from 5.35 percent to 5.1 percent. That is expected to reduce state collections by $666 million over three years. It is far less than what Senate Republicans had initially proposed, which was a cut from 5.35 percent to 2.8 percent. Legislators estimated the average family would get a tax cut of $103 per year, or roughly $4 a paycheck, but it would affect all tax filers.
• Child Tax Credit: Much like the Federal Tax Credit, lawmakers planned to approve a tax credit to help families with children and dependents. The credit would have been a $2,000 refundable tax credit for each child age four or younger. Refundable credits provide that money to taxpayers regardless of whether they have a state tax liability. It was unclear if any credit would be available for children/dependents over four.
• Expanded K-12 Education Credit: The maximum credit allowed for a family is $1,000 multiplied by the number of qualifying children in kindergarten through grade 12 in the family. The current income limit for the maximum credit is $33,500. The proposed bill would increase the income limit to $70,000 for a single parent and $140,000 for a married couple.

As you can see, many proposed changes could affect your 2022 Minnesota tax liability, and we hope to get more clarity in the coming months. If you are looking for more detail or have questions on these topics, please contact Kurt Dingmann at [email protected] or send us a message.