It’s a new year, and what better way to start it than by preparing for tax season?! I know, I know, taxes are not exactly everyone’s favorite thing to consider at this time of year. But if you’re a Minnesota resident, then making sure you understand the new Minnesota income tax conformity changes is crucial to ensuring you file your 2019 taxes with as little stress as possible.
You may already know that a new 2019 omnibus tax bill was passed back in May 2019. This means that Minnesota residents will now see fewer differences between their state and federal tax returns, as individual income tax law will now largely conform to federal tax law.
Understanding the Minnesota Income Tax Conformity Changes
The new bill is implementing numerous changes, but we’ll just cover the ones that are most likely to affect you.
The biggest development is probably Minnesota’s new starting point for calculating state taxable income. In 2018, you’d start with federal adjusted gross income (AGI), but for 2019, the starting point is federal taxable income. This is how some other states handle state taxable income, and Minnesota is now following suit.
The new law has also reduced the second-tier tax rate to 6.8%. (It used to be 7.05%.) This affects single filers who earn $26,521 to $87,110 per year and married couples filing jointly who earn between $38,771 and $154,020 per year.
The law has increased the Social Security subtraction, too. Single filers can subtract an extra $360, and married couples filing jointly can subtract an extra $450.
Part of the new bill means that Minnesota has adopted the increased federal standard deduction for 2019 and eliminated the personal exemption. Minnesota also created a state-specific dependency exemption ($4,250 per dependent, subject to income phaseout limits).
For 2019, tax treatment of the following itemized deductions is identical on Minnesota and federal returns:
- Medical/dental expenses
- State/local real estate and income taxes paid
- Home mortgage interest
- Charitable contributions
Minnesota also eliminated the deduction for tax preparation fees and investment expenses, which were suspended for federal tax purposes starting in 2018.
Phew, that’s a lot of alterations! But just as you should know what is changing, you should also know what is staying the same from 2018.
What Parts of Your Tax Return Will Stay the Same?
Minnesota’s old income tax rules weren’t tossed out altogether, and there are still some differences between the federal and Minnesota state rules. For example, Minnesota retained the deduction for unreimbursed employee expenses for 2019, which was disallowed for federal tax purposes starting in 2018.
Casualty losses greater than 10% of AGI are deductible on Minnesota returns even if the loss occurred outside a federally declared disaster area.
To help make this a little easier to understand, let’s look at an example of itemizing for Minnesota but not for federal tax purposes.
Take Jane Taxpayer, who has a combination of charitable contributions, state/local real estate and income taxes, and home mortgage interest totaling less than her federal standard deduction. Jane also has large amounts of unreimbursed employee expenses.
If her unreimbursed employee expenses plus the other deductions equal more than her federal standard deduction, Jane could reduce her Minnesota taxable income by itemizing on her Minnesota return even though she did not itemize on her federal return.
File Your 2019 Minnesota Tax Return with Confidence
For more information, a full summary of the bill is located on the Minnesota Legislature website. We will be taking all of these new changes into account as we assist our Minnesota clients with their financial and tax planning for the 2020 tax season.
One more thing worth noting: The good news is – it sounds like we won’t have to amend our 2018 returns now that the law has changed. The state is going to make adjustments where necessary. If you have any questions or concerns about this process or about the new Minnesota income tax conformity changes, please get in touch.
