Minnesota Gov. Mark Dayton has signed an omnibus tax bill that updates the federal conformity date for purposes of computing corporation franchise tax and personal income tax liability. The bill, which was approved by the state legislature during a short special session, also makes tax changes impacting the standard and itemized deductions for individuals, charitable donations of computer equipment, retiree drug benefits, teacher expense deductions, the nonresident tax and credit, and various tax credits.
Other stories cover provisions of the bill concerning sales and use taxes (TAXDAY, 2011/07/21, S.31), property taxes (TAXDAY, 2011/07/21, S.29), and mining taxes (TAXDAY, 2011/07/21, S.28).
Federal Conformity Provisions
The Internal Revenue Code (IRC) conformity date for purposes of computing income tax liability is extended from December 31, 2010, to April 14, 2011, effective for tax years beginning after 2009. However, references to the federal rules on foreign-source income are tied to the IRC as amended through March 18, 2010.
Due to the change in conformity Minnesota adopts most of the federal tax changes enacted by the two 2010 federal health care acts; the Small Business Jobs Act of 2010; the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRUIRJCA); and the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (Comprehensive 1099 TPRESOA). Although Minnesota adopts most of the recent changes in federal income tax law, income tax addition and subtraction adjustments continue to apply to:
— IRC §168(k) bonus depreciation, including 100% bonus depreciation for property placed in service after September 8, 2010, and before January 1, 2012; and
— IRC §179 enhanced expense deduction and investment phaseout threshold limits.
Income Tax Adjustments
Charitable contributions and donations. —The addition adjustment for corporation franchise taxpayers regarding the enhanced federal deduction for the donation of computer equipment is restricted to taxable years beginning before 2010.
Retiree drug benefits. —Effective July 21, 2011, the addition adjustment for corporation franchise and individual income taxpayers relating to the federal exclusion under IRC §139A for subsidies received by employers that provide retiree drug benefits is limited to tax years before 2013.
Itemized deductions and personal exemptions. —An addition to federal taxable income is required for itemized deductions and personal exemptions by certain higher-income individuals whose adjusted gross income (AGI) exceeds a threshold level.
The addition for itemized deductions, excluding medical expenses, investment interest expenses, or casualty or theft losses, is equal to the lesser of:
— 3% of the amount of the taxpayer’s AGI in excess of a threshold amount of $100,000 or $50,000 for a married individual filing separately, adjusted for inflation; or
— 80% of the itemized deductions otherwise allowable for the tax year.
The addition for personal exemptions is equal to the dollar amount of the personal exemptions claimed by the taxpayer for federal income tax purposes multiplied by:
— 2% for each $2,500 by which the taxpayer’s federal AGI exceeds the applicable threshold amount; or
— 2% for each $1,500 by which federal AGI exceeds the applicable threshold amount in the case of a married individual filing a separate return.
The threshold amount before adjustment for inflation is $150,000 for a surviving spouse and married taxpayers filing a joint return, $125,000 for a head of household, $100,000 for a single taxpayer, and $75,000 for a married taxpayer filing a separate return.
Standard deduction. —Effective for taxable years beginning after 2010 and before 2013, married taxpayers computing personal income tax liability are required to make an addition to taxable income equal to the amount of the enhanced federal standard deduction that is allowed for the 2011 and 2012 tax years.
Teacher expenses and higher education tuition. —The individual income tax addition adjustments relating to the federal deductions for certain classroom expenses of K-12 teachers and for higher education tuition are limited to tax years before 2010.
Effective 21, 2011, the Commissioner of Revenue is directed to initiate negotiations with Wisconsin for purposes of entering into a new reciprocity agreement that would be effective for tax years beginning after 2011. The Minnesota and Wisconsin Departments of Revenue also must conduct a benchmark study using information from 2011 income tax returns to determine the revenue impact of resuming such an agreement. The study is contingent on Wisconsin agreeing to participate and requires submission of a report to the Minnesota Legislature by March 1, 2013.
Credits and Other Provisions
Nonresident entertainer tax and credit. —Effective for compensation received after December 31, 2011, withholding for the 2% tax on compensation paid to a nonresident entertainer is not required if the compensation is less than $600. In addition, the tax does not apply to nonresident entertainers, including nonresident speakers, unless the total compensation received in the tax year exceeds the individual income tax filing threshold for a nonresident individual.
The $120 annual credit against the nonresident entertainer tax is repealed.
Health insurance premiums credit. —The credit Minnesota personal income taxpayers may claim for 20% of health insurance premiums paid to an employer-provided IRC §125 health care plan is repealed.
Working family credit. —Effective for tax years beginning after 2010 and before 2012, the earned income phaseout thresholds for married taxpayers that file joint individual income tax returns and claim the working family credit is increased by $5,000, as indexed for inflation from 2008 to 2011.
Marriage penalty credit. —The marriage penalty credit that taxpayers may claim against personal income tax liability is reduced by 50% of the amount of the addition to taxable income that is required for the enhanced federal standard deduction.
Political contribution refund. —Effective retroactively from July 1, 2011, personal income taxpayers may not claim a refund for political contributions made after June 30, 2009, and before July 1, 2013.
Mining exemption. —The corporation franchise tax exemption for certain mining operations subject to the Minnesota occupation tax is extended to include mining, producing, or refining of nonferrous ores, metals, and minerals.
Surplus lines insurance premiums tax. —A tax is imposed on persons, firms, or corporations that procure surplus lines insurance directly from a nonadmitted insurer. The rate of tax is equal to two percent of the gross premiums less return premiums paid by an insured whose home state is Minnesota. The tax is effective for nonadmitted insurance policies that go into effect after July 20, 2011, and brings Minnesota into conformity with the mandates of the federal Nonadmitted and Reinsurance Reform Act of 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203).
Ch. 7 (H.F. 20), Laws 2011, effective for tax years beginning after December 31, 2011, unless otherwise noted