United States: Minnesota Tax Conformity

Last Updated: August 13 2019
Article by Sara Ptacek and Allison Gregory

On May 30, 2019, Minnesota Governor Tim Walz signed an omnibus tax bill that will impact most Minnesota taxpayers. The new tax was designed to bring Minnesota tax law into more conformity to federal tax law. The newly adopted changes are generally effective for Minnesota purposes at the same time that the federal changes took effect, unless otherwise specified to start for the 2019 tax year. This means many changes could be required for 2018 Minnesota tax returns already filed or extended to be filed.

Tax laws, by the very nature of what they do, are usually complex. But, in Minnesota's case, considering that they had been in nonconformity to the federal tax reform changes made to federal law by the Tax Cuts and Jobs Act of 2017 (TCJA), the new Minnesota tax bill is creating the potential for an unusual amount of complexity in application.

Why? Primarily because Minnesota's new tax laws do not completely conform to federal law. That means Minnesota's taxpayers will need to understand which items conform to federal law and which don't.

Effective laws for tax year 2019 include:

  • Starting point – Calculation of Minnesota individual taxable income will start from Federal Adjusted Gross income; previously, it started with Federal Taxable Income.
  • Increased standard deduction – The standard deduction will be $24,400 for married filing joint taxpayers and $12,000 for single taxpayers. Head of Household standard deduction will increase to $18,350.
  • Dependent Exemption – Minnesota will allow a per-dependent exemption in the amount of $4,250 but eliminates all personal exemptions.
  • Itemized Deductions

    • Taxes Paid – Up to $10,000 of state and local taxes paid.
    • Charitable Contributions – Minnesota permanently adopted the TCJA's 60% AGI limit for charitable contributions.
    • Interest – Minnesota adopts TCJA change to the mortgage interest deduction.
    • Medical Expenses – Allows medical expenses in excess of 10% of AGI.
    • Unreimbursed Employee Expenses – TCJA suspended this deduction, but there is an important difference: Minnesota still allows this deduction. The deduction is limited to expenses in excess of 2% of AGI.
    • Casualty and Theft Losses – TCJA limited this deduction to declared disaster areas only. Minnesota did not limit to specific areas but is limited to losses in excess of 10% of AGI.
  • Charitable contributions – The charitable contribution deduction for charitable contributions over $500 will be based on whether the taxpayer itemizes for Minnesota purposes (rather than federal purposes under current law).
  • The second-tier tax bracket for individuals, estates and trusts has been reduced from 7.05% to 6.8%. Other tax brackets were not changed.

Laws effective retroactively to 2018 (the same time federal changes were in effect) include:

  • IRC Section 199A – No deduction is allowed for Minnesota purposes.
  • TCJA included expanding the definition of qualified property for section 179 and bonus rules. Minnesota has updated their provisions to match federal law under TCJA, but will continue to require an addition of 80% of the first-year deduction and a subtraction of 20% over the remaining 5 years.
  • Net Operating Losses – Limits the use of Corporate NOL carryforward to not exceed 80% of the taxpayer's income in the carryforward year.
  • Interest Limitation – Minnesota has conformed to TCJA Section 163(j) interest deduction limitation.

The Minnesota Department of Revenue is advising taxpayers not to amend their already filed 2018 tax returns for conformity-related issues. Correspondence will be sent to all taxpayers that have adjustments with changes to their returns. Refunds and notices of amounts due will be issued at that time. If 2018 tax returns are extended and not yet filed, the Department is advising taxpayers to wait until updated forms are released to file their returns. Updated 2018 forms are anticipated to be available near the end of August or early September.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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