March 26, 2014 Conference Call and WebEx for Tax Preparers Topic: 2013 Minnesota Individual Income Tax Retroactive law changes Speaker: Terri Steenblock, Assistant Commissioner Individual Income Tax Video: We will post a video of this conference call on our website. Introduction Today, we will discuss legislation passed on Friday March 21, 2014 that affects Minnesota income tax returns for tax year 2013. We will have another conference call at a later date to discuss: Business Income Tax Business to Business taxes Estate Taxes Withholding Taxes and Gift Taxes After the legislative session ends we will provide more details on law changes that affect tax years 2014 and beyond. Website All 2013 tax law change information can be found on our website at www.revenue.state.mn.us. Click on the orange button labeled Tax Law Changes for the latest updates. Subscribe to our email List Sign up directly at www.revenue.state.mn.us/subscribe. On our home page, click the red envelope. Enter your email address and select the Tax Law Changes topic. Taxpayers who have already filed. We are asking taxpayers who have filed their 2013 tax returns and were affected by the recent law change to wait until they hear from us before taking any action on their return. We will be working to identify and adjust returns that we have received. During the process of identifying and adjusting returns, one of three things will happen with the return. We: 1. Will adjust the return and send the taxpayer a letter explaining how it was adjusted. 2. Will request more information from the taxpayer and use that information to adjust their return. The taxpayer will receive a letter explaining how it was adjusted. 1
3. Will not be able to adjust the return. If this happens, the taxpayer will receive a letter explaining why their return can t be adjusted. In these instances, the taxpayer will need to file an amended return to get the benefits of the law changes. There were many forms, schedules, and instructions updated as a result of the law changes, Schedule M1NC The 2013 Schedule M1NC was used to calculate differences between federal and Minnesota adjusted gross income. This is important because there are items of income and deductions that are based on adjusted gross income. The recent law change makes this schedule unnecessary; you do not need to make separate, complex calculations for Minnesota purposes. (M1NC Line 1) Wages: Before the law change, there were three types of employee benefits that were exempt from federal tax, but had to be included in taxable wages for Minnesota purposes: Adoption benefits Transit benefits Education assistance Federally, taxpayers may exclude up to $12,970 in employer-provided adoption benefits from their federal taxable income. Because of the recent Minnesota law change, these benefits can also be excluded from Minnesota income. Taxpayers may also exclude up to $245 per month in employer provided transit benefits from federal taxable wages. Because of the recent Minnesota law change, these benefits can also be excluded from Minnesota income. Finally, employers may provide up to $5,250 in non-job related education assistance to employees without the employees paying taxes on that assistance. Because of the recent law change, these benefits can also be excluded from Minnesota income. In June 2013, we instructed employers to begin withholding income tax on these benefits and include the value of these benefits on their employees W-2s. These additional wages were reflected in box 16 of the W-2 when employers completed them. Taxpayers can ignore the value of these benefits when calculating their Minnesota taxable income, but they should not ignore the additional withholding included in box 17. When calculating Minnesota credits that are based on household income such as the Minnesota Dependent Care Credit, Education Credit, Homeowners Homestead Credit Refund and Renters Property Tax Refund these benefits must still be included in household income. (M1NC Line 2) Student Loan Interest Deduction: Federally, there were several provisions dealing with the student loan interest deduction that were extended. These provisions affected what interest was deductible and when the deduction phased out. 2
The recent Minnesota legislation adopted these changes. This means you will not need to work through a 14 step worksheet to determine what amount of student loan interest is and is not deductible for Minnesota purposes (M1NC Line 3) Tuition and Fees Deduction and Educator Expenses: Federal provisions that created above-the-line deductions for up to $4,000 of qualified tuition and fees and up to $250 of educator expenses were extended through 2013. The recent Minnesota law change extended these benefits for Minnesota tax purposes as well. When calculating Minnesota credits that are based on household income such as the M1CD Minnesota Dependent Care Credit, M1ED Education Credit, M1PR Homeowners Homestead Credit Refund and Renters Property Tax Refund these deductions must still be included as additional nontaxable income when calculating household income. (M1NC Line 4) Discharge of Indebtedness on Principle Residence: Federally, taxpayers are not taxed on the first $2 million of discharged qualified principle residence indebtedness. Minnesota now follows this exclusion. This may greatly benefit taxpayers who lost their home in a foreclosure or short sale or who had an amount of their mortgage debt forgiven. When calculating Minnesota credits that are based on household income such as the Minnesota Dependent Care Credit, Education Credit, Homeowners Homestead Credit Refund and Renters Property Tax Refund this income must be added back when calculating household income. (M1NC Line 5) Amounts Received Under Certain Scholarship Programs: Taxpayers may exclude from federal income any awards they receive from the National Health Service Corps Scholarship Program, and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program. Minnesota now allows taxpayers to exclude these benefits from taxable income. When calculating Minnesota credits that are based on household income such as the Minnesota Dependent Care Credit, Education Credit, Homeowners Homestead Credit Refund and Renters Property Tax Refund this income must be added back when calculating household income. (M1NC Line 6) IRA Distribution for Charitable Purposes: A federal provision that lets taxpayers age 70 ½ or older to exclude up to $100,000 per year in IRA distributions when the money goes directly to a qualified charitable organization was extended through 2013. Minnesota law now allows taxpayers, who take advantage of this federal exclusion to also exclude these distributions from their Minnesota taxable income. For both federal and Minnesota purposes, these charitable contributions are not deductible as itemized deductions because they were not included in income. (M1NC Line 7) Coverdell Education Savings Accounts: Federal law allows distributions from a Coverdell education savings account to be used to pay elementary and secondary education expenses without causing the account beneficiary the student to incur a tax liability. Minnesota law now allows the same exclusion. 3
(M1NC Line 8) Certain Dividends Paid to Nonresident Aliens. Certain interest-related dividends paid to nonresident aliens are not taxed federally. The recent law change makes these dividends also exempt from Minnesota taxation. (M1NC Line 9) Accelerated Depreciation for Business Property on an Indian Reservation: A federal provision that allows special recovery periods for qualified business property on an Indian reservation was extended. The recent law change allows the same recovery period for these assets for Minnesota purposes. (M1NC Line 10) Modified Expensing for Certain Qualified Film and Television Production Expenses: Under an extended federal provision, up to $15,000,000 of qualified film and television production expenses may be expensed rather than capitalized. Minnesota law now allows these expenses to be deducted the same way they are federally. (M1NC Line 11) Depreciation of Qualified Leasehold Improvements, Restaurant Buildings and Retail Improvements: A federal provision that allows a 15-year recovery period for qualifying improvements or buildings was extended through 2013. Minnesota law now allows this same recovery period, meaning taxpayers do not need to calculate separate Minnesota depreciation on these assets. (M1NC Line 12) Modified Depreciation for Motorsports Entertainment Complexes: A federal provision that allows taxpayers to depreciate the cost of a motorsports entertainment complex over 7 years was extended through 2013. For Minnesota purposes, taxpayers may now calculate their depreciation over the same 7 year period. (M1NC Line 13) Election to Expense Advanced Mine Safety Equipment: Taxpayers are allowed to expense 50% of the cost of certain mine safety equipment placed in service during 2013 for federal and now Minnesota purposes. This saves Minnesota taxpayers from keeping separate depreciation schedules for these assets. (M1NC Line 14) Basis Adjustment to stock of S Corporations Making Charitable Contributions of Appreciated Property: If an S-corporation donates appreciated property to charity, the shareholders may deduct their proportionate share of the asset s fair market value as a charitable deduction. For federal purposes, the shareholders reduce their basis in the s-corporation by their proportionate share of the corporation s adjusted basis in the asset. Minnesota law now follows this rule meaning shareholders do not have to calculate different federal and Minnesota basis. There are no differences between the federal and Minnesota treatment for any of the items on this schedule, which is why the 2013 Schedule M1NC is now obsolete. Schedule M1SA, Minnesota Itemized Deductions. Schedule M1SA was a new schedule for 2013 that was used to calculate the difference between federal and Minnesota allowable itemized deductions. There were a number of federal law 4
changes that caused taxpayers to be required to file this schedule and for these amounts to be different. The recent law change makes this schedule unnecessary. In other words, Minnesota no longer requires different treatment of mortgage insurance premiums, qualified charitable distributions or other itemized deduction. Schedule M1M Income Additions and Subtractions (M1M Line 1) Increased Standard Deduction for Married Taxpayers: The recent law change did not conform Minnesota law to match the increased standard deduction for married taxpayers. As a result, married taxpayers who claim the standard deduction must still add back $2,050 or $1,025 to their Minnesota income depending on whether they filed jointly or separately. (M1M Line 2) Limitation on Itemized Deductions: Taxpayers no longer have their itemized deductions limited on their federal return if their federal AGI is $250,000 or less for single filers, $275,000 or less for heads-of-households, and $300,000 or less for married joint filers. For Minnesota purposes, taxpayers are subject to this limitation if their federal AGI is more than $178,150 (or $89,075 for married separate filers). Because Schedule M1SA is obsolete, this calculation is now handled on Schedule M1M, line 2. (M1M Line 3) Personal and Dependent Exemption Phase Out: Taxpayers with higher incomes must separately compute a phase-out of personal and dependent exemptions and enter an addition to their income on Schedule M1M. Taxpayers are no longer subject to the phase-out on their federal return if their AGI is $250,000 or less for single filers, $275,000 or less for heads of households, and $300,000 or less for married joint filers. But Minnesota s lower phase-out limits affect taxpayers whose federal AGI exceeds $178,150 for single filers, $222,700 for heads of household, $267,200 for married joint filers, and $133, 600 for married separate filers. (M1M Lines 15 and 37) Because Schedules M1NC and M1SA are now obsolete, these lines have been intentionally left blank. There should no longer be a value entered on these lines. (M1M Line 19) Charitable deduction for taxpayers who did not file Schedule A: Taxpayers who took advantage of the charitable IRA distribution are not allowed a deduction for the contribution because the distribution was not included in their income. For Minnesota purposes, taxpayers who did not file a federal Schedule A may deduct 50% of their total contributions that exceed $500. M1WFC and the Minnesota Working Family Credit changes in general. The changes to the Minnesota Working Family Credit help reduce taxes for middle class families who file a Minnesota tax return. 5
Like the Federal Earned Income Credit, the Minnesota Working Family Credit increases as a taxpayer s earned income increases and, once a taxpayer s income reaches a certain amount, the credit begins to decrease until it is reduced to $0. The federal credit increases over the same range, but decreases at different income ranges for married and single taxpayers. For tax year 2012, the Minnesota credit increased and decreased over the same income range for married and single taxpayers. The recent law change means the Minnesota credit increases over the same income range for married and single taxpayers; however, the credit decreases over an extended range for married taxpayers. To make this change easier, we have added the updated table to the online Schedule M1WFC and M1instruction booklet (pages 20-23.) We posted a one page informational sheet on our website under Tax Law Changes to help explain this change. Regarding the working family credit, we will not be able to identify all of the affected taxpayers who may be entitled to a credit. We can t identify people in this range if they have never filed for the credit because we: Don t know the qualified dependents and Can t determine the earned income If you have taxpayers who qualify for the working family credit as a result of the law change, you will need to amend their return. Before you amend the return, make sure the taxpayer does not have any other return adjustments associated with the law changes. If they do, wait until we notify the taxpayer telling them we have or have not adjusted their return. This will ensure the amended return you file is based on the most recent return information. Schedule M1PR, the Homeowners Homestead Credit Refund and Renter s Property Tax Refund, Schedule M1CD, the Child and Dependent Care Credit and Schedule M1ED, the K- 12 Education Credit. There were minor changes to all of these forms. When we were using Schedule M1NC, all of the adjustments from M1NC were included on line 5, additional non-taxable income. Even though Schedule M1NC is now obsolete, there are items of income that were reported on Schedule M1NC that must still be included in household income when calculating these credits. They are: Employer provided Adoption, Education and Mass Transit Benefits. Home mortgage debt forgiveness Awards from the National Health Service Corps Scholarship Program and F. Edward, and Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program 6
There are also deductions that were reported on Schedule M1NC that must be included as additional nontaxable income on line 5 of Schedules M1CD, M1ED and M1PR. These deductions are: The $250 educator expense deduction, and The tuition and fees deduction 7