HF4123

Purpose

• To expand Minnesota’s net investment income tax (NIIT) and raise revenue by applying a broader set of income to the tax. Specifically, it widens the scope to include all trade or business income that is exempt from self-employment taxes, and adds a 1% NIIT on income above $1,000,000 for individuals, estates, and trusts. The bill also adjusts how the tax is calculated for nonresidents and for estates and trusts.

Main provisions

• Net investment income definition
  • Uses the meaning in Internal Revenue Code (IRC) section 1411c, but with two key adjustments:
  • It excludes the net gain from the disposition of property classified as class 2a under Minnesota law (section 273.13, subdivision 23).
  • It includes all income from a trade or business that is not excluded from net investment income under IRC 1411c6.
• Tax rate and threshold
  • In addition to the regular tax, a 1% tax is imposed on net investment income for individuals, estates, and trusts that exceed $1,000,000.
• Nonresident treatment
  • For an individual who is not a Minnesota resident for the entire tax year, the NIIT is calculated as if the individual were a Minnesota resident for the entire year, then multiplied by a fraction. The fraction's numerator is the net investment income allocable to Minnesota under section 290.17, and the denominator is the total net investment income for the year.
• Estates and trusts
  • The NIIT liability for estates and trusts is computed by multiplying the NIIT amount by a fraction. The numerator is the portion of the estate or trust’s net investment income allocated to Minnesota under sections 290.17, 290.191, and 290.20; the denominator is the taxpayer’s total net investment income.
• Administrative references
  • The NIIT interacts with existing tax provisions and Minnesota statutes, including sections 290.06 (subdivision 2c), 290.17, 290.191, and 290.20, and the IRC references noted above (1411c and related subsections, 273.13(23)).

How this changes existing law

• Broader tax base: The NIIT now applies to a wider range of income, specifically all trade or business income that is exempt from self-employment taxes, expanding beyond what was previously taxed.
• New 1% rate with a $1 million threshold: A 1% NIIT applies only to net investment income above $1,000,000 for individuals, estates, and trusts, introducing a high-income trigger.
• Allocation and apportionment rules: The bill adds explicit rules for how to allocate or apportion NIIT when a taxpayer is not fully resident in Minnesota for the year or when the income is held by estates or trusts, ensuring Minnesota’s share is properly taxed.
• Alignment with federal tax concepts: The definition of net investment income follows IRC 1411 with specified exceptions and inclusions, tying the state tax framework to federal definitions while allowing Minnesota-specific carve-outs.

Significance

• Increases potential tax liability for high-income individuals, estates, and trusts by broadening the income types taxed and establishing a high-income threshold with a 1% rate.
• Introduces prorated calculations for nonresidents and for estates/trusts to determine Minnesota-sourced NIIT, aiming to more accurately reflect Minnesota income attribution.

Relevant Terms - net investment income tax (NIIT) - Minnesota - trade or business income - self-employment tax - 1% tax - $1,000,000 threshold - individuals - estates - trusts - nonresident allocation / apportionment - allocable to Minnesota - total net investment income - Internal Revenue Code (IRC) section 1411 - IRC 1411c - IRC 1411c6 - class 2a - section 273.13(23) - Minnesota Statutes 290.033 - 290.06 - 290.17 - 290.191 - 290.20 - Section 290.17 (allocation) - Section 290.191 (estate/trust allocation) - Section 290.20 (estate/trust definitions)