Changes to Minnesota tax laws – Omnibus Tax Bill impacts Minnesotans

Governor Dayton signed the new Minnesota Omnibus Tax Bill (HF677) at the end of the most recent legislative session. Below is a summary of several of the changes that will impact taxpayers required to file Minnesota returns:

  • Increase to individual, trust, and estate income tax rates for 2013
  • Changes to estate regulations in Minnesota
  • New gift tax regulations for Minnesota effective July 1, 2013
  • Changes to corporate taxes
  • Changes to sales and use taxes
  • Changes to property tax and renters’ refunds

New individual, trust, and estate income tax rates and brackets

The legislation includes the creation of a fourth "tier" of income tax. Effective for the tax year beginning 2013, a new rate of 9.85 percent, representing a 2 percent increase over the previous highest rate, will apply to:

  • Married taxpayers and surviving spouses with taxable income greater than $250,000
  • Single taxpayers with taxable income greater than $150,000
  • Head of household taxpayers with taxable income greater than $200,000

Estates, trusts, and married individuals filing separate returns must compute their income tax by applying the married individuals’ filing joint return rates to their taxable income, except that the income brackets will be one-half of the statutory amounts.

Because of this change and the fact that the tax is retroactive to the beginning of the year, the bill also allows for the abatement of late and underpayment penalties for estimated taxes so long as the balance due is determined to have been paid by Sept. 15, 2013.

The law also increases the taxable income limits of the lower brackets, potentially providing tax relief for lower income taxpayers who may have been near the top of the brackets under the previous rate structure.

Changes to estate and gift tax regulations in Minnesota

Minnesota has added a tax to gifts made after June 30, 2013. Any gifts made after this date will be subject to a tax rate of 10 percent of the amount of the taxable gift. The definition of a gift for Minnesota purposes is the same as that for the federal gift tax imposed under the Internal Revenue Code. There will be a credit against taxes for the first $1 million of gifts given over the lifetime of the taxpayer. Minnesota will follow the federal exclusion for gifts given under a dollar amount specified by the Internal Revenue Code.

In addition to the new gift tax, the bill has broadened the scope of the Minnesota taxable estate. Effective for those who pass away after Dec. 31, 2012, the taxable estate of the decedent will be adjusted to include gifts that were made within three years of the decedent’s date of death.

The definition of the situs (taxable location) of tangible personal property included in a Minnesota estate was expanded to include, with respect to gifts executed within three years of death, the "state or country in which it was normally kept or located when the gift was executed."

For a nonresident decedent with Minnesota real or tangible personal property held in a pass-through entity, the situs of the property is determined as if the pass-through entity does not exist and the property is personally owned by the decedent. If there were multiple owners of the pass-through entity, the ownership percentage of the property is determined in proportion to the decedent’s capital ownership of the entity.

Furthermore, a credit will now be allowed against the tax due on the Minnesota estate tax return of a Minnesota nonresident decedent. The credit will be equal the amount of estate tax paid to another state that is attributable to the Minnesota situs property held in a pass-through entity, but cannot be in excess of the tax paid on the Minnesota estate tax return of the nonresident decedent.

The estate tax will be reduced by the amount of gift tax paid by the decedent on gifts included in the taxable estate (any gifts executed within three years of the decedent’s date of death).

Changes to corporate taxes

Lest you think the provisions in this new law apply only to individuals, for C and S corporations with tax years beginning in 2013, the corporate minimum fees and thresholds/brackets at which they apply were increased. The updated minimum fee will now top out at $9,340, up from the previous maximum fee of $5,000. Future increases will be tied to the Consumer Price Index.

For corporations that have foreign operating companies, various corporate tax loopholes are being closed effective beginning tax year 2013, such as eliminating the foreign royalties subtraction as well as eliminating an obsolete subtraction for foreign sales corporations.

For corporations that have taken advantage of the refundable research and development credit for Minnesota, this credit is nonrefundable if the amount of credit exceeds a taxpayer’s tax liability effective beginning tax year 2013. Credits for tax years 2010 through 2012 continue to remain refundable.

Changes to sales and use taxes

  • The following goods and services will be subject to sales and use tax effective June 30, 2013:
    • Digital goods, such as digital audio works, digital audio-visual works, digital books, and digital video games delivered electronically
    • Business-related warehousing and storage (does not include self-storage services) – This tax is not effective until after March 31, 2014
    • Business-related electronic and precision equipment repair
    • Commercial and industrial machinery and equipment repair
  • Effective for sales and purchases after Aug. 31, 2014, an upfront sales tax exemption is allowed for capital equipment purchases that are used in the manufacturing production process

Changes to property tax and renters’ refunds

The bill has increased the maximum refund allowed and the income thresholds and limits for both the Homestead credit and Renters’ credit.