Purpose

• Update Minnesota's individual income tax system by changing how tax is calculated across filing statuses, introducing an optional simplified tax method for lower-income taxpayers, and adjusting rules for nonresident taxpayers and entities that elect to pay tax.

Main Provisions

• Tax brackets and rates (four-rate schedule)

  • The bill uses a four-bracket structure with rates of 5.35%, 6.8%, 7.85%, and 9.85% applied to taxable net income.
  • Different bracket thresholds are provided for each filing status:
  • Married filing jointly/surviving spouses: four brackets with specified upper limits (the first bracket begins at a low amount and the top bracket applies above the highest threshold).
  • Married filing separately and estates/trusts: brackets are the same four rates but the income thresholds are half of the corresponding joint thresholds.
  • Unmarried individuals: four brackets with their own set of thresholds.
  • Head of household: four brackets with their own set of thresholds.
  • The exact dollar thresholds are listed in the bill for each status.

• Optional simplified tax method

  • Instead of applying the four-rate schedule, a taxpayer whose taxable net income is below a commissioner-set amount can use tax tables (not more than 100 brackets) prepared by the commissioner.
  • Taxes in the tables are computed using the same four rates.
  • Fractions of a dollar under 50 cents are ignored; 50 cents or more may be rounded up to the next whole dollar.

• Nonresident taxpayers and allocations

  • Nonresidents compute Minnesota tax using Minnesota-source federal adjusted gross income (as defined in the Internal Revenue Code) plus specific additions and minus certain subtractions, then apply a proportion (a fraction) that compares Minnesota-source income to total federal adjusted gross income.
  • The numerator includes Minnesota-source federal AGI plus specified additions and minus specified subtractions; the denominator is total federal AGI plus the same additions and minus the same subtractions.
  • The calculation also accounts for the allocation and assignability of reductions or deductions, consistent with other Minnesota tax rules (allocation/assignability provisions).

• Tax for nonresidents with electing entities

  • If a nonresident taxpayer is a qualifying owner of a qualifying entity that elects to pay tax, the individual must compute Minnesota tax as described above and must include, to the extent attributed to the electing entity, the applicable additions and subtractions in the calculation.

• Credits and final tax

  • After applying any nonrefundable credits, the tax liability is multiplied by the aforementioned fraction for nonresidents (and similarly modeled for applicable residents under the new framework).

Significant Changes to Existing Law

• Replaces or substantially updates the existing Minnesota four-bracket structure with new bracket thresholds and the same four rates, including specific halving of brackets for married filing separately and estates/trusts.
• Introduces a simplified, table-based tax option for low-income taxpayers.
• Expands and clarifies the nonresident tax calculation to use Minnesota-source income, with a defined fraction based on Minnesota-source vs. total federal AGI, and explicit handling of additions, subtractions, and allocation/assignability.
• Adds rules for taxpayers who own an electing qualifying entity, tying the entity’s tax treatment to the individual’s Minnesota tax calculation.
• Keeps the framework of nonrefundable credits but places them before the applicable fraction is applied.

Implementation Notes

• Tax is calculated on “taxable net income” using the new bracket schedule, with separate thresholds by filing status.
• The commissioner has authority to issue the simplified-tax tables and set the threshold amount for the table method.
• Rounding rules: fractions are handled as described above (less than 50 cents ignored; 50 cents or more rounded up to the next dollar).
• The bill ties certain adjustments and subtractions to existing statutory sections (e.g., 290.0131, 290.0132, 290.0137) and refers to federal definitions in the Internal Revenue Code.

Practical Implications

• Taxpayers will see changes to the amount of tax owed based on new brackets and thresholds, with some statuses facing different bracket structures than others.
• Lower-income taxpayers may opt into a simpler, table-based method.
• Nonresident taxpayers and owners of electing entities face a more detailed computation that links Minnesota tax to both Minnesota-source and total federal income, with careful treatment of additions, subtractions, and allocations.

Relevant Terms - Minnesota income tax - Tax brackets - Rates: 5.35%, 6.8%, 7.85%, 9.85% - Taxable net income - Filing statuses: married filing jointly, surviving spouse, married filing separately, unmarried, head of household - Nonresident taxation - Commissioner (of revenue) - Tax tables (simplified method) - Additions and subtractions (as defined in sections 290.0131, 290.0132, 290.0137) - Minnesota source federal adjusted gross income (MSFAGI; defined in the Internal Revenue Code) - Allocation and assignability provisions - Qualifying entity and electing entity (section 289A.08)