Purpose

This bill would change Minnesota’s Working Family Credit (WFC) for residents. It specifically removes eligibility for people who only have an Individual Taxpayer Identification Number (ITIN) to claim the WFC, and it adjusts how the credit is calculated and phased out.

Main Provisions

• Eligibility and rules

  • Applies to Minnesota residents who qualify for the federal tax credit under section 32 of the Internal Revenue Code (IRC), with one exception for people without qualifying children who are 19 to under 65.
  • A person who otherwise qualifies for the federal credit remains eligible even if their earned income or federal adjusted gross income (AGI) is higher than the usual federal limit, and the IRC section 32m rule does not apply.
  • Availability to claim the WFC with an ITIN is removed (ITIN holders cannot claim the WFC under this bill).

• Credit amount and structure

  • The WFC would be four percent of the first $8,750 of earned income.
  • Additional amounts (incentives for older children):
  • +$925 for a taxpayer with one qualifying older child
  • +$2,100 for a taxpayer with two qualifying older children
  • +$2,500 for a taxpayer with three or more qualifying older children
  • The credit is phased out in the same way as the Minnesota phaseout for the WFC described in section 290.0661 subdivision 4, with a special note: if a taxpayer has one or more qualifying older children but did not qualify for the credit under 290.0661, the phaseout rate would be 9%.

• Special allocation rule

  • For residents who have earned income not subject to Minnesota tax, the WFC would be allocated based on the ratio of federal AGI minus the portion of earned income not subject to tax under Minnesota law to federal AGI.
  • Certain items are not considered “earned income not subject to tax” for this purpose:
  • Subtractions for military pay (Minnesota 290.0132 subdivisions 11 and 12)
  • The combat pay exclusion under IRC section 112
  • Income from an Indian reservation earned by an enrolled member living on the reservation

Significant Changes to Existing Law

• ITIN eligibility removed: Individuals using an ITIN can no longer claim the Minnesota WFC.
• New calculation base: The WFC is defined as four percent of the first $8,750 of earned income, plus targeted increases for older children.
• Expanded use for older children: Additional credits are provided for having qualifying older children (1: +$925, 2: +$2,100, 3 or more: +$2,500).
• Phaseout linkage: The WFC phaseout would be aligned with the existing Minnesota phaseout framework, with a specific 9% rate applying in certain scenarios for families with older children who didn’t qualify under another provision.
• Allocation rules for non-taxed earned income: A new method to allocate the WFC when part of income isn’t taxed, including specific exclusions that don’t count as earned income for the credit.

How the Change Works in Practice (Overview)

• A Minnesota resident who meets federal criteria for the WFC would get a credit equal to 4% of their first $8,750 of earned income, plus potential extra amounts for older children.
• People with qualifying older children could receive larger credits.
• Those who only have ITINs would not be eligible for the WFC under this bill.
• The credit would gradually reduce (phase out) based on income, with some special rules for families with older children and certain non-taxed income.

Relevant Terms - Working Family Credit (WFC) - ITIN (Individual Taxpayer Identification Number) - Earned income - Qualifying older child - Minnesota Statutes 2024 section 290.0671 - Section 290.0661 (phaseout) - Internal Revenue Code (IRC) Section 32 - IRC Section 32m - Federal adjusted gross income (AGI) - Allocation ratio - Military pay subtraction (Minnesota 290.0132) - Combat pay exclusion (IRC Section 112) - Indian reservation income (enrolled member living on reservation)