HF236

Purpose

This bill changes how Minnesota taxes Social Security benefits on individual income tax returns. It aims to provide tax relief by allowing a subtraction from taxable Social Security benefits, with a special provision that fully subtracts Social Security benefits for veterans and surviving spouses who are veterans' spouses.

Main Provisions

• Subtraction options: Taxpayers can use one of two methods to subtract Social Security benefits:

  • Simplified subtraction (the “simplified subtraction”).
  • Alternate subtraction (the “alternate subtraction”).
  • The taxpayer is allowed the larger amount of the two methods.

• Simplified subtraction details:

  • The simplified subtraction equals the amount of taxable Social Security benefits, after reducing for certain phaseouts (the reductions described below).
  • Phaseout reductions: If adjusted gross income (AGI) is above a threshold, the simplified subtraction is reduced.
  • For most taxpayers (not filing separately), the phaseout thresholds are:
    • $100,000 for married filing jointly or surviving spouse
    • $78,000 for single or head of household
    • Half the joint threshold for married filing separately
  • For married taxpayers filing separately, the reduction is 10% for each $2,000 (or part of a $2,000) above the threshold.
  • The exact reductions depend on filing status and whether the taxpayer is filing separately.

• Alternate subtraction details:

  • The alternate subtraction is the lesser of:
  • the taxable Social Security benefits, or
  • a maximum subtraction amount, which is limited by rules based on filing status and “provisional income.”
  • Maximum subtraction by status:
  • Joint return or surviving spouse: up to $5,840, reduced by 20% of provisional income above $88,630.
  • Single or head of household: up to $4,560, reduced by 20% of provisional income above $69,250.
  • Married filing separately: up to half the joint maximum, reduced by 20% of provisional income above half of the threshold used in d.
  • Provisional income: defined as modified adjusted gross income (MAGI) plus half of the taxable Social Security benefits. Social Security benefits have their own IRC-based definitions referenced in the bill.
  • Threshold adjustments: The commissioner adjusts the phaseout thresholds over time, per existing law, with amounts rounded to the nearest $10 (and if the amount ends in 5, rounded up).

• Special provision for veterans and surviving spouses:

  • Notwithstanding the general rules above, the bill provides that the Social Security benefits received by a veteran or a surviving spouse of a veteran are fully subtracted (the full amount of those benefits is exempt from taxable Social Security subtraction limits).
  • In this context, “veteran” is defined as in a specified statute referenced in the bill.

• Effective year basis:

  • The thresholds and maximums referenced are prepared with a statutory year tied to the year stated in the bill (the 2023 year in the text), with annual adjustments to be made as described.

Significant Changes to Existing Law

• The bill amends Minnesota Statutes 2024 section 290.0132, subdivision 26, to:

  • Create two subtraction methods (simplified and alternate) and allow taxpayers to claim the larger amount.
  • Introduce explicit phaseout calculations and provisional income tests that reduce the subtraction for higher-income taxpayers.
  • Establish maximum subtraction amounts by filing status and require reductions based on provisional income.
  • Define provisional income and reference related Internal Revenue Code terms.
  • Mandate annual adjustments to phaseout thresholds, with rounding rules.
  • Guarantee a full subtraction for Social Security benefits received by veterans and surviving spouses, irrespective of the usual phaseout rules.

• Overall effect: More taxpayers can reduce their taxable Social Security benefits, especially veterans and surviving spouses, through a combination of subtraction approaches, with specific income-based limits and annual threshold adjustments.

Practical Implications

• Tax relief for Social Security: Many Minnesota residents with Social Security benefits could see a reduction in taxable income, lowering state income tax liability.
• Veterans benefit: Veterans and their surviving spouses receive a full subtraction of their Social Security benefits, which can significantly reduce or eliminate the tax on those benefits.
• Administration: The Department of Revenue (commissioner) will annually adjust thresholds and ensure proper rounding, maintaining consistency with other tax rules.

Relevant terms - Social Security benefits - subtraction (tax subtraction) - simplified subtraction - alternate subtraction - phaseout threshold - adjusted gross income (AGI) - provisional income - modified adjusted gross income (MAGI) - taxable Social Security benefits - maximum subtraction - joint return - surviving spouse - single - head of household - married filing separately - veteran - surviving spouse of a veteran - Internal Revenue Code (IRC) references (section 86b2, 86d1, 86) - commissioner (department/administration) - thresholds adjusted by law (section 270C.22) - rounding to the nearest $10 (and rounding up on .5)