June 8, 2017 — UPDATE: The Tax Cuts and Jobs Act has become law since this article originally appeared. This article is still accurate on the state level. If you’d like to learn about the key provisions of tax reform, please click here.
While federal tax changes are still a big unknown, Governor Mark Dayton recently signed an omnibus tax bill that enacts several changes that will impact Minnesota business and individual taxpayers. Listed below are highlights of the bill and the new tax laws:
Residency
- The new law contains a big change for taxpayers with concerns over residency. For tax years beginning after December 31, 2016, the location of a taxpayer’s advisors (e.g. attorney, CPA, investment banker) cannot be a determining factor in determining residency under the domicile test. This means that taxpayers who have relocated outside of Minnesota can continue to work with their trusted advisors who are located in Minnesota.
Estate Tax
- The Minnesota estate tax exemption increases through 2020. Currently, the exemption is $1,800,000, which is increased to $2,100,000 under this bill (retroactive to January 1st). In 2018, it will increase to $2,400,000 and each year will increase $300,000 until it reaches $3,000,000 in 2020.
Farming
- Income Tax Credits - For tax years beginning after December 31, 2017, an individual or corporation who sells or rents agricultural assets to a beginning farmer is entitled to an income tax credit. The credit is based on a percentage of the sales price of the equipment or a percentage of the gross rents. The maximum credit for the sale of equipment is $32,000 and the maximum credit for rent ranges from $7,000 - $10,000 per year for the first three years of the rental agreement.
- Financial Management Tax Credit – For tax years beginning after December 31, 2017, an income tax credit is available to individual and corporate beginning farmers who participate in an approved financial management program. The credit is equal to the costs paid by the farmer to participate in the program and is capped at $1,500.
Individual Taxpayers’ Subtractions From Income (Effective for tax years beginning after December 31, 2016)
- Section 529 college savings plan or prepaid tuition plan - a deduction of $1,500 ($3,000 married filing joint) is allowed for contributions to such plans offered by any state
- Student loan discharge – a deduction is allowed for certain student loan indebtedness that is discharged by the lender
- Social security benefits - taxpayers can subtract from taxable income an amount of social security benefits ranging from $2,250-$4,500, subject to income thresholds
- Installment sale gain – Non-resident owners are required to recognize all gain on an installment sale of a Minnesota pass through entity in the year of the sale. The individual can elect out of this treatment by agreeing to file Minnesota tax returns to recognize the gain in the same years as the gain is recognized for federal purposes.
Credits
- Dependent Care Credit - Credit is increased to equal the federal credit for tax years beginning after December 31, 2016
- Working Family Credit - For tax years beginning after December 31, 2018 the credit is available to taxpayers with no qualifying children provided they meet all other requirements for the credit
- Research credit – For tax years beginning after December 31, 2016 the credit rate on expenditures that exceed $2,000,000 increases from 2.5% to 4%
- Student Loan Credit - A non-refundable credit (capped at $500) for principal and interest payments on qualified student loans is allowed for tax years beginning after December 31, 2016
- Section 529 College Savings Plan Credit – a credit of $500 (subject to phase out) is allowed for contributions to qualified plans (A taxpayer cannot claim this credit if they claim the Section 529 plan deduction referenced earlier)
There are many other provisions in the tax bill that could impact both individual and business taxpayers in Minnesota. But at least the tax picture is much clearer at the state level than at the federal level. Before taking any action, however, consult with a tax expert and understand how these changes and provisions might impact your specific tax situation. If you'd like to speak with someone and get a head start on tax planning, you can reach out to your Redpath and Company tax advisor or Gloria McDonnell at 651-407-5829 or gmcdonnell@redpathcpas.com.