HF4845

Purpose

• The bill aims to raise state revenue by introducing a new fifth tier of the individual income tax and by increasing funding for local governments through higher appropriations for Local Government Aid (LGA) and County Program Aid (CPA). It also updates how Minnesota taxes are calculated and collected for individuals, estates, and trusts.

Main Provisions

• New fifth tax tier: Creates a top income tax rate of 10.85% on income above certain thresholds, applicable to high-income taxpayers.
• Expanded rate schedules: Establishes a multi-tier schedule of rates for:
  • Married individuals filing joint returns and surviving spouses
  • Married individuals filing separate returns
  • Unmarried individuals (single)
  • Head of household
  • Estates and trusts
• Specific bracket thresholds and rates:
  • For married filing jointly and surviving spouses: rates start at 5.35% for the lowest bracket and climb through tiers up to 10.85% for the highest bracket (income over the top threshold).
  • For unmarried individuals: rates start at 5.35% and progress through 6.8%, 7.85%, 9.85%, and 10.85% with corresponding income ranges.
  • For head of household: same tier structure with its own bracket thresholds.
• Optional low-income calculation method: In lieu of the standard rate schedule, low-income taxpayers may use commissioner-prepared tables based on income brackets (not more than 100 brackets) to calculate tax, with rounding rules (fractions under 50 cents may be increased to 1 cent, depending on rules).
• Nonresident taxation: Nonresidents must calculate Minnesota tax using rules that compare Minnesota source federal adjusted gross income to federal adjusted gross income, applying a fraction to adjust for Minnesota-only income and deductions.
• Special treatment for entities: If a nonresident is a qualifying owner of a qualifying entity that elects to pay tax, the individual must compute tax as provided, including certain amounts attributed to the electing entity.
• Credits and allocations: The bill references nonrefundable credits and allocation/assignability provisions that affect how credits are applied and how income is allocated between Minnesota and other jurisdictions.
• Funding implications: Increases to appropriations for Local Government Aid (LGA) and County Program Aid (CPA) to support local governments.

How It Affects Law and Taxpayers

• High earners: Will face a new top tax rate (10.85%) on income above the established threshold, increasing the overall marginal tax burden for the highest filers.
• Most filers: Tax rates for lower income brackets are reorganized into the new tiered schedule, which may change the exact tax owed for many taxpayers, depending on filing status.
• Low-income filers: May be able to use simplified tables to calculate tax, potentially making filing simpler for some.
• Nonresidents and part-year residents: Tax calculations become more complex, with specific rules to determine Minnesota-source income and adjustments.
• Local governments: Funding for LGA and CPA increases, which could impact property taxes and local services.

Significant Changes to Existing Law

• Establishment of a new fifth tax tier/top rate (10.85%) for high-income levels.
• Redefinition and expansion of income tax brackets across filing statuses (married joint, married separate, single, head of household, estates/trusts).
• Introduction of commissioner-provided tax tables for low-income filers.
• New formulas for calculating tax for nonresidents and for taxpayers with ownership in qualifying entities that elect to pay tax.
• Revisions to credits, allocation, and assignability rules that affect how Minnesota tax liability is determined and how income and deductions are allocated.

Implementation Considerations

• Taxpayers will need to determine their filing status and locate the correct bracket thresholds to compute tax under the new schedules.
• Corporate and individual nonrefundable credits, as well as allocation/assignability rules, will determine final tax liability for residents and nonresidents.
• Local governments may see increased funding under LGA and CPA, with potential downstream effects on local property taxes and services.

Relevant Terms - Minnesota income tax - Schedules of rates (rates) - Fifth tier / top rate - 5.35%, 6.8%, 7.85%, 9.85%, 10.85% (tax brackets) - Filing statuses: married filing jointly, married filing separately, single, head of household, estates and trusts - Taxable net income - Taxable income - Commissioner-prepared tables - Nonrefundable credits - Minnesota source federal adjusted gross income - Allocation and assignability provisions - Qualifying entity / electing qualifying entity - Local Government Aid (LGA) - County Program Aid (CPA) - Nonresident taxation - Federal adjusted gross income (FAGI)