Purpose

This bill changes how Minnesota calculates property tax refunds by redefining what counts as income for the refund calculation and by excluding veterans educational benefits from being counted as household income. It amends Minnesota Statutes to adjust which income items are included, excluded, or subtracted when determining refund eligibility and amount.

Key definitions and framework

• Income is redefined for refund calculations as the sum of:
  • The federal adjusted gross income (FAGI) plus a broad list of items that are not part of FAGI, including various non-taxable and special-income items.
• Some amounts are specifically excluded from being treated as income, even if they would otherwise be included.
• Certain amounts can be subtracted from income as exemptions for dependents, with multipliers that vary by the number of dependents and disability/age status.
• The bill uses terms from the Internal Revenue Code (IRC) and references retirement accounts and deductions to determine how to handle retirement contributions and distributions.

Main provisions

• Redefined Income for refunds

  • Income means the sum of:
  • Federal adjusted gross income (FAGI) as defined in the Internal Revenue Code.
  • Plus a list of items to the extent they are not already included in FAGI, such as:
    • All nontaxable income
    • Passive activity losses (and related carryovers) not disallowed under specific IRC rules
    • Discharge of qualified farm indebtedness for solvent individuals, excluded from FAGI
    • Cash public assistance and relief
    • Pensions and annuities (including Social Security, SSI, and veterans benefits) that were not exclusively funded by the claimant or spouse, or which funding payments were excluded from FAGI when paid
    • Interest from federal/state governments or their instrumentalities
    • Workers’ compensation
    • Nontaxable strike benefits
    • Disability or sick pay
    • A lumpsum distribution under IRC section 402(e)(3) (as amended)
    • Contributions by the claimant to retirement accounts (IRAs, 401(k), etc.) to the extent the sum exceeds the retirement base amount for the claimant and spouse
    • Distributions from retirement accounts to the extent not included in FAGI (traditional or Roth)
    • Nontaxable scholarship or fellowship grants
    • Alimony received (to the extent not included in the recipient’s income)
    • Deductions and credits like tuition deductions and certain teacher expense deductions
  • For fiscal year tax filers, FAGI is adjusted to reflect the FAGI for the fiscal year ending in the calendar year.
  • FAGI shall not be reduced by net operating loss carrybacks/forward or capital loss carrybacks/forwards for the year.

• Income does not include certain items

  • The bill specifies several exclusions from being counted as income, such as:
  • Amounts excluded under IRC sections 101(a) and 102
  • Certain pensions/annuities exclusively funded by the claimant or spouse that were included in FAGI in the years they were paid
  • Amounts contributed to retirement accounts (to the extent included in FAGI, but not to exceed the retirement base amount)
  • Excess food or relief in kind from government agencies
  • Relief granted under this chapter
  • Child support payments
  • Restitution payments received by eligible individuals (and excludable interest per specified law)
  • Alimony paid
  • Veterans disability compensation
  • Veterans educational assistance exempted from taxation under Title 38, Section 5301(a) (including certain education benefits described in Section 197.79)

• Deductions from income (exemption calculations)

  • The sum of the following amounts may be subtracted from income as exemptions:
  • For the first dependent: exemption amount × 1.4
  • For the second dependent: exemption amount × 1.3
  • For the third dependent: exemption amount × 1.2
  • For the fourth dependent: exemption amount × 1.1
  • For the fifth dependent: exemption amount × 1.0
  • If the claimant or spouse had a disability or was age 65 or older on or before December 31 of the year, an extra exemption amount applies

• Key terms for exemptions and retirement calculations

  • Exemption amount: defined as the exemption amount under Minnesota statute for the taxable year
  • Retirement base amount: the deductible amount for the claimant and spouse under IRC section 219(b)(5A), adjusted for inflation
  • Traditional or Roth retirement accounts: includes plans under IRC sections 401, 403, 408, 408A, and 457

• Practical implementation notes

  • The definition of FAGI for those filing on a fiscal year basis uses the FAGI for the fiscal year ending in the calendar year
  • The bill clarifies which items can be added back to or subtracted from income to determine refund eligibility and amount

Significant changes to existing law

• Broad inclusion of non-taxable and various special-income items into the calculation of income for property tax refunds, and a more explicit framework for excluding certain types of income (notably veterans education benefits) from household income.
• Introduction of a structured use of exemptions for dependents with multipliers, plus an extra exemption for dependents when there is disability or age 65+.
• Explicit treatment of retirement account contributions and distributions in the income calculation, including caps via the retirement base amount.
• Alignment with IRC provisions tied to deductions and certain income items (e.g., tuition deductions, teacher expenses) to determine what counts as income for refunds.

Potential impact

• Veterans educational benefits would generally be excluded from household income when calculating property tax refunds, which could increase refunds for households that receive such benefits.
• Households with multiple dependents or with a disability/65+ member may see changes in refund amounts due to the new tiered dependent exemptions.
• The changes may adjust refunds for filers using fiscal-year tax reporting.

Summary of what this bill does

• Overhauls how income is calculated for Minnesota property tax refunds.
• Adds back or counts many types of income that were previously treated differently, while also excluding certain items (notably veterans education benefits) from being counted.
• Introduces a structured dependent exemption system with multipliers and an age/disability enhancement.
• Sets out retirement account treatment and keeps alignment with federal tax concepts (FAGI, IRC provisions).

Relevant terms - federal adjusted gross income (FAGI) - Internal Revenue Code (IRC) - income - nontaxable income - passive activity loss - section 469 - discharge of qualified farm indebtedness - 108g - cash public assistance and relief - Social Security Act - Supplemental Security Income (SSI) - veterans benefits - veterans educational assistance - retirement accounts (IRA, 401(k), 403(b), 408, 408A, 457) - traditional or Roth retirement accounts - retirement base amount - exemption amount - dependent exemptions (multipliers: 1.4, 1.3, 1.2, 1.1, 1.0) - disability and age 65 exemption - teacher deductions (section 62A2D) - tuition deductions (sections 220, 223) - student grants/scholarships (nontaxable) - Lumpsum distribution (IRC 402e3)