HF3998

Purpose

This bill creates a new tax subtraction (a reduction in taxable income) for individuals aged 17 or younger in the current tax year. The goal is to lessen the amount of income that younger taxpayers owe in Minnesota state income tax.

Main Provisions

• Adds a new Subdivision 40, titled “Subtraction for children,” to Minnesota Statutes 2024 section 290.0132.
• For a taxpayer who is 17 years old or younger during the taxable year, the full amount of that taxpayer’s income is subtracted from taxable income.
• If the taxpayer was claimed as a dependent on someone else’s return, the subtraction is capped and calculated as: 1) the amount of that taxpayer’s earned income, plus 2) the amount the taxpayer was required to add to adjusted gross income (AGI) under section 290.0131, plus 3) the lesser of:
  • the amount of unearned income the taxpayer included in AGI, or
  • two times the standard deduction amount for dependents for the taxable year under section 290.0123 subdivision 3.
• Definitions included in the subdivision:
  • "Income" means any income that is included in AGI or any amount that must be added to AGI under section 290.0131.
  • "Unearned income" means the portion of AGI that is not earned income.

Key Definitions and How They Work

• Income: Any amount counted in AGI or required to be added to AGI under 290.0131.
• Earned income: Income earned through work or labor (as part of the overall subtraction for non-dependents, and as part of the dependent calculation’s components).
• Unearned income: Income not earned (for example, investment or passive income) and included in AGI.
• AGI: Adjusted gross income, the starting point for calculating the subtraction.
• Dependent: A taxpayer who is claimed on another return (for whom the subtraction is subject to the caps described above).
• Standard deduction for dependents: The baseline deduction amount used in Minnesota tax calculations for dependents, which is used to determine the cap on the dependent subtraction.
• Section references: 290.0131 (amounts added to AGI), 290.0132 (the subtraction in general, with the new Subd. 40), and 290.0123 subdivision 3 (dependent standard deduction).

Significant Changes to Existing Law

• Creates a new age-based subtraction specifically for minors (age 17 and younger).
• Introduces a dependent-specific cap that limits the subtraction to the sum of earned income, the amount added to AGI under 290.0131, and the smaller of unearned income or twice the dependent standard deduction.
• Clarifies definitions for "income" and "unearned income" within this subtraction to align with the payment calculations and AGI-related rules.

Practical Implications

• For a non-dependent 17-year-old or younger, all of their income can be subtracted from taxable income, reducing tax liability.
• For dependents, the subtraction is more restricted, potentially reducing how much of the minor’s income can be subtracted depending on earned vs. unearned income and the dependent standard deduction.
• The bill ties the subtraction to specific existing sections and definitions, ensuring consistency with current tax rules while providing tax relief targeted at minors.

Relevant Terms - subtraction for children - income - earned income - unearned income - adjusted gross income (AGI) - dependent - standard deduction for dependents - section 290.0131 - section 290.0132 - section 290.0123 subdivision 3 - Minnesota Statutes 2024 - taxable year - 17 or younger