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.

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.

The net investment income tax must also be determined and calculated for an owner’s composite income tax election and an entity’s pass-through entity tax election.

This bill provides for a subtraction for certain qualified public pension income. The subtraction applies to state or federal pension plans whose members do not qualify for social security benefits and is limited to:

• $25,000 for a married taxpayer filing a joint return or surviving spouse
• $12,500 for all other filers

The phase-out threshold equals:

• $100,000 for a married taxpayer filing a joint return or surviving spouse
• $78,000 for a single or head of household taxpayer

For taxpayers with adjusted gross income above the phase-out threshold, the subtraction is reduced by 10% for each $2,000 of adjusted gross income in excess of the threshold. The effective date is tax year 2023 or later.

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.

The bill expanded Minnesota’s Social Security subtraction to allow taxpayers to subtract the greater of a new Simplified Method (described below) of calculating the subtraction or Alternative Method (described below), which is similar to the subtraction as it had been calculated under prior law.

For a new “Simplified Method,” taxpayers with adjusted gross income below $100,000 for married joint returns or $78,000 for single or head of household returns are eligible, and the subtraction is phased out by 10% for each $4,000 of adjusted gross income (AGI) in excess of the phase-outs mentioned. 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 continue to claim the state subtraction amounts with a calculation similar to prior law (the “Alternative Method”), if those amounts are greater than the new “Simplified” approach established in the bill.

The effective date is tax year 2023 and later.

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 $226,650 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.

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.

This bill states unemployment compensation received by individuals in taxable year 2021 is a subtraction from income, as decided by the Minnesota Court of Appeals in February 2021. This is effective retroactively for taxable years beginning after December 31, 2020, and before January 1, 2022.

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.

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.

The Angel Investment Tax Credit was extended through tax year 2024, with an appropriation of $5 million per year.

Enacts a child tax credit (CTC) equal to $1,750 per child under 18, with no cap on the number of children. This credit is phased out, along with an amended Working Family Credit, for those with incomes over $35,000 and married filing jointly, or $29,500 for other filers.

The language allows all taxpayers, including unmarried taxpayers, with a newborn child who do not have dependent care expenses to claim the newborn credit. This credit deems the taxpayer to have paid the maximum amount of expenses for one dependent for the purposes of the credit.

The bill made several changes to the K-12 Education Credit.

First, the bill clarified statutory language. Second, the bill simplified the definition of income that is used for purposes of the credit by using adjusted gross income rather than calculating household income.

Third, the bill made several changes to eligibility and credit amounts:

• Increased income eligibility from $33,500 to $70,000
• Increased credit amount from $1,000 to $1,500 multiplied by number of qualifying children
• Added inflation adjustment to help credit keep pace with increased expenses

The bill makes the credit for military service available per calendar year.

This bill allows a refundable credit equaling 4% of the first $8,750 of earned income for eligible Minnesota residents. The credit is increased by:

• $925 for a taxpayer with one qualifying older child (age 18 or older)
• $2,100 for a taxpayer with two qualifying older children
• $2,500 for a taxpayer with three or more qualifying older children

The Working Family Credit (WFC) is combined with the Minnesota Child Tax Credit (MCTC) and then phased out together at 12% of income above a certain income threshold. If the taxpayer has a WFC that includes a qualifying older child and they did not qualify for the MCTC, the phase-out rate is 9% of income above the threshold. Filers with Individual Income Tax Identification Numbers (ITINs) are now able to claim the WFC.

The tax bill included a one-time income tax rebate for tax year 2021. The credit equals $520 for a married couple filing a joint return and $260 for a single filer, head of household, or married taxpayer filing a separate return. If taxpayers have dependents, the credit is increased by $260 per dependent up to an additional maximum credit of $780. For details, visit Direct Tax Rebate Payments.

The Transportation Finance and Policy bill included a new electric bike rebate program that takes effect July 1, 2024. The credit maximum is $1,500. Individuals must assign the credit at time of purchase to an eligible retailer, reducing the cost of purchase. $4 million is appropriated for fiscal year 2024, with $2 million to be used in each of the 2024 and 2025 calendar years. The rebate is available until June 30, 2026.

The maximum refund was increased to $75 for an individual and $150 for a married couple filing jointly. The changes apply to refunds for contributions made on or after January 1, 2024.

The tax bill provides a one-time increase of for the 2022 Homestead Credit Refund (for Homeowners) and Renter’s Property Tax Refund (Form M1PR):

• Refunds for homeowners and renters were increased by 20.5%. Taxpayers who already filed a 2022 Form M1PR may see a larger refund than originally claimed. We’ll adjust previously filed returns. We expect to start issuing the larger refunds in mid-July for renters and mid-September for homeowners.
• Homeowners may now qualify for a special (or “targeting”) refund if their property tax increased by more than 6% — rather than 12% — from 2022 to 2023. We’ll publish more information when available.

The bill also makes other changes to property tax refunds, including:

• Homestead Credit Refund — Homeowners who have an Individual Taxpayer Identification Number (ITIN), instead of a Social Security Number, can now qualify for homestead status for their residence and claim the refund.
• Renter’s Refund — Starting with rent paid in 2024: Renters will claim the refund on their Minnesota income tax return (Form M1). Owners and managing agents must provide a Certificates of Rent Paid (CRP) and submit CRPs to Revenue by January 31.

Expands existing cannabis income tax subtractions to include non-medical cannabis license holders.

Recodifies certain composite income tax and pass-through entity tax definitions from Chapter 289A to Chapter 290. Visit Composite Income Tax and Pass-Through Entity Tax for more information.

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.

Changes the corporate net operating loss (NOL) deduction limitation from 80% to 70% of taxable net income.

For dividends received by a corporation owning 20% or more of stock of another corporation, the deduction is reduced from 80% to 50% of the dividends received.

For dividends received by a corporation owning less than 20% of stock of another corporation, the deduction is reduced from 70% to 40% of the dividends received.

These changes will be reflected in the 2023 forms and instructions this fall.

Conforms generally to the federal treatment of Global Intangible Low-Taxed Income (GILTI), but not the federal section 250 deduction, and repeals the relating income tax subtraction modifications. Clarifies that GILTI will be treated as dividend income for the purposes of the corporate dividends received deduction and the sales factor.

Clarifies that overpayments of nonresident withholding tax are limited to the amount of overpayment that was not deducted or withheld from the shares of the partners or shareholders.

The pass-through entity (PTE) tax was changed in the following ways:

• Expands eligibility by allowing partial elections if not all owners are qualifying owners.
• Requires 100% allocation to Minnesota for resident partners.
• Removes the requirement that one qualifying owner must be subject to the limitation on state and local taxes (SALT Cap).
• Provides for a special rule for Federal Adjusted Gross Income (FAGI) calculation for individual qualifying owners.
• Clarifies that PTE taxes paid to another state may qualify for the Minnesota Credit for Taxes Paid to Another State.
• Clarifies eligibility for a single member limited liability company (LLC) if the LLC is taxed as a partnership or S corporation.
• Requires partnerships with federal audit adjustments to file an amended Schedule PTE.

Extends the film production tax credit through 2030 and increases the annual appropriation from $4.95 million to $24.95 million. Also changes the $1 million expenditure threshold timeline to apply in any 12-consecutive-month period beginning with the first expenditure being paid, rather than by the taxable year.

Extends the historic structure rehabilitation tax credit through fiscal year 2030. Also provides for a special rule to revive the credit for projects that started rehabilitation work after June 30, 2022, but before July 1, 2023, to apply for an allocation certificate if the application is received on or before August 30, 2023.

Enacted a new nonrefundable tax credit for sales of manufactured home parks to cooperatives. The credit is equal to 5% of the amount of the sale. We will publish more information soon.

Increases the credit for sale of agriculture assets to 8% of the sales price, for a maximum credit of $50,000. For sales to emerging farmers, the credit rate is increased to 12% of the sales price.

Also allows for the sale of agricultural land to family members to qualify for the credit so long as the sales price of the land is equal to or greater than the assessed value of the land.

Enacted a new nonrefundable tax credit for railroad infrastructure modernization of Class II or Class III railroads. We will publish more information soon.

The Transportation Finance and Policy bill included a new refundable tax credit for $1.50 per gallon of sustainable aviation fuel produced or blended in Minnesota sold for use in planes departing Minnesota airports. This tax credit will be available for fuel sold beginning July of 2024. We will publish more information soon.