Major Provisions of the 2023 Minnesota Omnibus Tax Bill

June 12, 2023 - On May 24, 2023, Minnesota Governor Tim Walz signed a wide-reaching omnibus tax bill into law. The bill brings about some significant changes that will impact Minnesotans in the areas of personal, business, and state and local taxation.

Personal Taxes

The most significant changes from an individual tax standpoint focus on rebates, credits, and refunds. For high income earners, there are phaseouts for using standard and itemized deductions on their tax returns.

At this time, the Minnesota Department of Revenue is asking taxpayers to refrain from amending previously filed Minnesota income tax returns to account for the changes. The Department is reviewing the tax law changes and will share guidance and tax forms for affected tax years when they are available.

Direct Tax Rebate Payments

The tax bill provides for a one-time income tax rebate of up to $1,300 to eligible Minnesotans. Qualification and payments are based on 2021 Minnesota income tax returns. Revenue will send rebate payments this fall to those that qualify so if your address or banking information has changed from what was reported on your 2021 return, the information will need to be updated later this summer through a secure online portal provided by the Department of Revenue. For those that opted out of direct deposit or did not provide banking information with their 2021 return, paper checks will be mailed. The rebate amounts are calculated as follows:

• $520 for married couples filing a joint return with adjusted gross income of $150,000 or less.
• $260 for all other individuals with adjusted gross income of $75,000 or less.
• Another $260 for each dependent claimed on the return, up to three dependents.
• There is no income phase-out for qualification, the limits above are a hard stop.
• In addition to the income limits above, eligibility is limited to individuals that:
  • Were Minnesota residents for all or part of 2021.
    • Partial year residents will receive reduced payment amounts based on the percentage of the year they lived in Minnesota.
  • Filed a 2021 Form M1 individual income tax return or M1PR by December 31, 2022.
  • Were not claimed as a dependent on someone else’s 2021 Minnesota income tax return.

Child Care Tax Credit and Working Family Tax Credit

For tax years beginning after December 31, 2022, a refundable childcare tax credit and a working family credit will be available to taxpayers. The size of each credit depends on household income. The full Minnesota Child Care Tax Credit is worth $1,750 per child and begins to phase out for married filers earning more than $35,000 per year and $29,500 for all other filers. The bill also expands the Child Care Tax Credit to be available to single filers with a newborn child that do not have dependent care expenses by creating the “newborn credit” which allows qualified filers to claim the childcare credit using the maximum amount of expenses allowed for one dependent, whether or not they actually incurred dependent care expenses. The Working Family Credit is increased for taxpayers with 1, 2, or 3 or more children and is phased out jointly with the child tax credit.

Social Security Income Tax Exemptions

Under the new law, couples with annual income of up to $100,000 and single filers earning up to $78,000 would be exempt from state tax on social security benefits (the exemption phases out at $140,000).  This is effective for tax years beginning after December 31, 2022.

New Net Investment Income Tax

An additional 1% tax will be assessed to individuals, estates, and trusts on their net investment income exceeding $1,000,000 effective for tax years beginning after December 31, 2023.

Renter’s Property Tax Credit Changes

Effective for tax years beginning after December 31, 2023, the renter’s property tax credit will be treated as a refundable income tax credit that will be claimed on the individuals Minnesota income tax return rather than filing a separate form (M1PR) and receiving a refund payment in August or September. In addition, the method of calculating income for determination of the credit amount will be adjusted gross income (AGI) rather than the previously used “household income”. For refunds based on rent paid in 2022, the bill also provides for a one-time increase of 20.572% of the amount of the renters’ credit due.

Homestead Property Tax Credit and Special Property Tax Refund

As with the one-time increase in the renters’ credit, a one-time increase in the amount of homestead credit refund in the amount of 20.572% was approved for refunds based on property taxes payable in 2023. In addition, the ‘special refund’ which applies to homeowners whose property taxes increased by more than 12% from the previous year will now apply to homeowners with property tax increases larger than 6% and the maximum refund is increased to $2,500 from $1,000.

Standard and Itemized Deduction Changes

The phaseouts for standard and itemized deductions for high income earners (those with adjusted gross income in excess of $220,650) are amended beginning with tax year 2023. In addition, the Minnesota itemized or standard deduction will be reduced by 80% for those with AGI over $1 million.

Student Loan Forgiveness

The tax bill permanently adopts the federal exclusion from taxable income as provided for under the American Rescue Plan Act for student loan debt that has been discharged.

Business Taxes

For Minnesota businesses, the tax landscape continues to evolve. Some of the major changes will affect pass-through entities, deductions for dividends received, and conformity to federal tax codes for net operating losses and global intangible low tax income (GILTI).

Pass-Through Entity Tax (PTET)

The PTET allows partnerships and S corporations to file and deduct state taxes for qualifying owners to get around the $10,000 state and local tax limitation. Qualifying owners includes individual or estate partners in a partnership; or individual, estate, or trust shareholders of an S corporation.

These PTET changes are effective for taxable years beginning after December 31, 2022. Minnesota made several enhancements to the PTET including:

• Allows 100% of a resident qualifying owner’s income to be used in calculating the PTET. Nonresident qualifying owners will continue to use the income allocated/apportioned to Minnesota.
• Allows a credit against PTET on a qualifying entity for PTET paid to another state. The credit for taxes paid to another state may only be claimed by a qualifying owner.
• Tiered PTE’s can elect to file and pay the PTE tax for qualifying owners. This allows partnerships with entity owners to be able to pay the PTET for non-entity owners.
• Removes the requirement that qualifying owners must be limited by the SALT cap.
• The PTET ends when the federal SALT deduction cap expires.

Net operating losses (NOLs)

Effective for taxable years beginning after December 31, 2022, the amount of the Minnesota net operating loss deduction cannot exceed 70% (previously 80%) of taxable net income in a single taxable year.

Global intangible low-taxed income (GILTI)

Effective for tax years beginning after December 31, 2022, Minnesota tax code now conforms to the federal treatment of GILTI, except Minnesota does not allow an IRC Section 250 deduction. GILTI is classified as dividend income for Minnesota purposes and is subject to the revised Minnesota DRD provisions.

Dividends received deduction (DRD)

For tax years beginning after December 31, 2022, Minnesota reduced the dividend received deduction to 50% or 40% (previously 80% and 70%) for dividends received by one corporation from another corporation. Dividends received from a corporation at least 20% owned qualify for the 50% DRD. Those owning less than 20% may claim a 40% DRD.

State and Local Taxes

With the recent trend of individual states charging a so-called “fee” for delivery of product into their state, Minnesota has enacted its own “retail delivery fee” with passage of the 2023 Minnesota transportation finance and policy bill. Other updates and new provisions under the omnibus tax bill include tax increases for the seven-county metro area, vehicle excise tax increases, and new tax exemptions.

Retail Delivery Fee

Effective July 1, 2024, a fee of 50 cent retail delivery fee will be imposed on retail deliveries into Minnesota for all transactions greater than $100.

The fee can be separately stated and collected from the purchase, or the retailer can choose to pay it. If the fee is separately stated, it needs to be separate from any delivery fee and is not subject to sales tax. The fee must be stated on the invoice as “road improvement and food delivery fee.”

The following retail deliveries are exempt from the Retail Delivery Fee:

1. A retail delivery to a purchaser who is exempt from sales and use tax.
2. A retail delivery of a qualified motor vehicle.
3. A retail delivery resulting from a retail sale of food and food ingredients or prepared food.
4. A retail delivery resulting from a retail sale by a food and beverage service establishment, regardless of whether the delivery is made by a third party.
5. A retail delivery resulting from a retail sale of drugs and medical devices, accessories and supplies, or baby products.

Small Seller Exemption

• A retailer that made retail sales totaling less than $1 million in the previous calendar year.
• A marketplace provider when facilitating the sale of a retailer that made retail sales totaling less than $100,000 in the previous calendar year through the marketplace provider.

Sales and Use Tax

Effective October 1, 2023, the seven-county metro area will see 1% sales and use tax rate increase. Counties included are Anoka, Carver, Dakota, Hennepin, Ramsey, Scott, and Washington. The increase includes:

• Regional transportation sales tax:  0.75%
• Metropolitan sales tax: 0.25%

Other Sales Tax Changes

• Many sales and use tax exemptions were added for construction materials, for specific local governments and school districts, for specific building and infrastructure projects. Effective dates differ between specific exemptions (Construction exemptions 297A.71).
• Exemption for Secure Firearm Storage Units- Effective 7/1/2023.
• Effective July 1, 2023, the Motor Vehicle Excise Tax will increase from 6.5% to 6.875%.
• Effective July 1, 2023, the sale of property used in a trade or business includes sales between a sole member of a disregarded LLC and the disregarded LLC qualify for the sales tax exemption for tangible property used in a trade or business, that is not in the normal course of business of selling that kind of property (297A.68 Subd. 25).