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Below is the transcript from today's conference call with Assistant Commissioner Terri Steenblock on federal tax conformity.
Thank you to all who participated in today's call.
Today, we will be talking about federal nonconformity and how it affects Minnesota’s individual income tax calculations and returns.
Let’s go to our 2013 Tax Law Changes site. From there, click on Individual Income Tax and then on Federal income tax conformity. You can see there are drafts of the main income tax forms we are talking about today and an item-by-item explanation of the effects of non-conformity.
A number of federal tax provisions were set to expire on December 31, 2012. But the Federal American Taxpayer Relief Act extended some of those provisions, temporarily or permanently.
The 2013 Minnesota omnibus tax bill included federal conformity only for tax year 2012 and not for 2013. As a result, the provisions that were extended at the federal level have expired for Minnesota tax purposes.
So what does this mean for Minnesota taxpayers?
It means that the many federal provisions that were extended by the Federal American Taxpayer Relief Act will have a different treatment on the 2013 Minnesota return.
It also means that we had to make a lot of changes in Minnesota income tax forms.
We are going to discuss these changes and walk through the forms. They include:
We have used this schedule in past years, but it will now look quite different. Before, Schedule M1NC had all adjustments to taxable income. But for 2013, it will only include adjustments to Minnesota AGI.
Taxpayers who are affected by any items we’re about to discuss must complete Schedule M1NC to compute Minnesota AGI, household income and the required adjustments to Minnesota taxable income.
For taxpayers who are not required to file Schedule M1NC, Minnesota AGI will equal federal AGI.
Some taxpayers will have to prepare a re-computed Form 1040 for Minnesota purposes if they have certain items of income, losses or above-the-line deductions that are subject to calculations or phase outs The most common examples are Social Security Income, Rental Real Estate losses and IRA deductions.
Line by line of Schedule M1NC.
(M1NC – Line 1) Wages: There are three types of employee benefits that are exempt from federal tax but must be included in taxable wages for Minnesota purposes:
Taxpayers may exclude up to $12,970 in employer-provided adoption benefits from their federal taxable income. For Minnesota purposes, the full value of this assistance must be included on Schedule M1NC.
Taxpayers may exclude up to $240 per month in employer provided transit benefits from federal taxable wages. For Minnesota purposes, these benefits must be included on Schedule M1NC to the extent they exceed $125 per month.
Minnesota did not adopt the extension of the $5,250 federal exclusion for education benefits. So Minnesota taxes all employer-provided education assistance, except where those benefits:
In June we instructed employers to start withholding income tax on the benefits that are now taxed by Minnesota. However, taxpayers are still responsible to report this income on Schedule M1NC even if their employer failed to follow the instruction.
You can see more about this under the Withholding link on our Tax Law Changes web page.
(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 is deductible and when the deduction phases out.
For Minnesota purposes, interest is not deductible when it’s paid either voluntarily or after the first 60 months that interest payments are required on a loan.
Minnesota also has different income thresholds for the deduction phase out. For single taxpayers, the deduction begins to phase out at Minnesota modified adjusted gross income of $50,000 and is fully phased out at $65,000. For joint filers, the phase out begins at Minnesota MAGI of $75,000 and is fully phased out at $90 ,000.
The phase out is calculated using Minnesota MAGI. Therefore, taxpayers who are affected by another income related item of nonconformity must take into account those other items before calculating their Minnesota student loan interest deduction. The difference between their federal and state deduction will be added back on Schedule M1NC.
(M1NC – Line 3) Tuition and Fees Deduction: A federal provision that created an above-the-line deduction for qualified tuition and fees was extended through 2013.
For Minnesota purposes, taxpayers who claimed this deduction will need to add the amount they deducted back to their income on Schedule M1NC.
(M1NC – Line 3) Educator Expenses Deduction: For teachers, the first $250 of out-of-pocket expenses for classroom materials is still deductible on their federal return as an adjustment to gross income. But these expenses are not deductible when determining Minnesota adjusted gross income in 2013.
As a result, any educator expenses deducted above-the-line on a taxpayer’s federal return must be included on Schedule M1NC.
Taxpayers who itemized deductions for federal purposes may take educator expenses as an unreimbursed employee business expense on Schedule M1SA which we will discuss later.
(M1NC – Line 4) Discharge of Indebtedness on Principle Residence: Federally, Taxpayers are not taxed on the discharge of qualified principle residence indebtedness. But any taxpayer who had this type of debt forgiven in 2013 must add the amount of discharged debt when determining their Minnesota tax.
(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, the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program. But these awards are taxed by Minnesota and must be included on Schedule M1NC.
(M1NC – Line 6) IRA Distribution for Charitable Purposes: A federal provision that lets taxpayers age 70 ½ or older exclude up to $100,000 per year in IRA distributions when the money goes to a qualified charitable organization was extended through 2013. Under federal law, taxpayers who exclude the distributions from their income under this provision are not allowed to deduct the contribution on Schedule A.
Taxpayers who take advantage of the federal exclusion will need to add the IRA distribution to their Minnesota income on Schedule M1NC.
Taxpayers who itemize deductions on their federal return can deduct the contribution on their Minnesota return using Schedule M1SA, which we’ll talk about later.
Taxpayers who don’t itemize on their federal return will still be able to deduct half of the contribution that exceeds $500 on Schedule M1M.
(M1NC – Line 7) Coverdell Education Savings Accounts: A federal provision that lets taxpayers use distributions from a Coverdell Education Savings Account for elementary and secondary education expenses was made permanent.
But any earnings included in the distribution are taxed by Minnesota and must be added to income if they are used for K-12 education expenses.
(M1NC – Line 8) Certain Dividends Paid to Nonresident Aliens. Certain interest-related dividends paid to nonresident aliens are not taxed federally. But Minnesota taxes these dividends, so they must be included on Schedule M1NC.
(M1NC – Line 9) Accelerated Depreciation for Business Property on an Indian Reservation: A federal provision that allows a special recovery period for qualified business property on an Indian reservation was extended.
For Minnesota purposes, taxpayers who utilize the special recovery period must compute their depreciation under the regular class life for the property. The extra amount that is deductible on the federal return must be included on Schedule M1NC.
(M1NC – Line 10) Modified Depreciation for Certain Qualified Film and Television Production: Under an extended federal provision, the cost of any qualified film or television production may be expensed rather than capitalized if the cost of the production is less than $15,000,000.
For Minnesota tax purposes, taxpayers must capitalize the expenses and calculate the depreciation under the regular class life. The excess amount deducted on the federal return must be entered on Schedule M1NC and will increase Minnesota AGI.
(M1NC – Line 11) Depreciation of Qualified Leasehold Improvements, Restaurant Buildings Improvements and Retail Improvements: A federal provision that allows a 15-year recovery period for qualifying improvements or buildings was extended through 2013.
For Minnesota purposes, taxpayers must compute their allowable depreciation based on a 39-year class life. They must include on Schedule M1NC the difference between the depreciation allowed on their federal and Minnesota returns.
(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 must recalculate their allowable depreciation based on a 15 or 39-year life (as appropriate). They must include on Schedule M1NC the difference between the depreciation allowed on their federal and Minnesota returns.
(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 purposes.
For Minnesota tax purposes, taxpayers must capitalize the full cost of the advanced mine safety equipment. They must include on Schedule M1NC the difference between the depreciation allowed on their federal and state returns.
(M1NC – Line 14) Basis Adjustment to stock of S Corporations Making Charitable Contributions of Property:
For both federal and state purposes, S-Corporation shareholders may deduct their proportionate share of the fair market value of the donated property.
Federally, the shareholders reduce their basis in the corporation by their share of the corporation’s adjusted basis in the property.
For Minnesota, the shareholders must reduce their basis in the corporation by the deduction they claim.
Schedule M1SA, Minnesota Itemized Deductions.
This is a new schedule. It’s used to calculate differences between state and federal itemized deductions. Schedule M1SA may result in either an increase or a decrease in Minnesota taxable income.
In past years, taxpayers had to prepare a recomputed federal Schedule A to calculate their Minnesota allowable itemized deductions. For 2013, Minnesota Schedule M1SA will lead taxpayers through this calculation.
Taxpayers must complete Schedule M1SA if they filed a federal Schedule A and any of the following apply:
(M1SA – Line 7) Mortgage Insurance Premiums: Federally, taxpayers with income below certain limits are allowed to deduct the cost of home mortgage insurance premiums on their federal return. But these premiums are not deductible for Minnesota purposes and must be included on line 7 of Schedule M1SA.
(M1SA – Line 9) Gifts by cash or check: The contributions by cash or check that may be deducted for Minnesota is entered on this line. Taxpayers will start with the cash and check contributions from line 16 of their Schedule A, and add any distribution from their IRA that were excluded from federal income because they were donated to charity.
(M1SA – Line 10) Enhanced Charitable Deduction for Contributions of Food Inventory: A federal provision that lets individual taxpayers claim an enhanced deduction for charitable food donations has been extended through 2013.
This provision lets taxpayers deduct such donations as if they were a C-corporation. That is, they can deduct twice their basis in the food or deduct their basis plus one-half of the unrealized profit – whichever is less.
For Minnesota purposes, a taxpayer’s deduction of food inventory is limited to their basis. For these donations, taxpayers must recalculate their allowable charitable deduction, and will not be allowed a Minnesota carryover of the excess federal contribution.
(M1SA – Line 10) Enhanced Charitable Contributions of Real Property Made for Conservation Purposes: A federal provision that lets taxpayers claim an enhanced deduction for the donation of interests in real property has been extended through 2013.
The provision allows this deduction up to 50% of AGI rather than limiting it to 20% or 30%. The carry-over period for excess contributions was also extended to 15 years.
For Minnesota purposes, a taxpayer’s deduction of these real property donations is limited to 20% or 30% of their Minnesota AGI depending on the type of charity. They will be allowed a carryover of the difference in their allowable state and federal deductions.
Keep in mind the charitable deduction limitations which, on Schedule M1SA, are determined using Minnesota AGI. This means taxpayers may be allowed higher charitable deductions on Schedule M1SA than on Schedule A, or taxpayers may have a different deduction carry forward for Minnesota purposes.
(M1SA – Line 22) Itemized Deduction Phase Out: 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 must calculate the phase-out using Minnesota AGI and adjust their itemized deductions on Schedule M1SA. The Minnesota phase-out affects taxpayers whose Minnesota AGI exceeds $178,150 (or $89,075 for married separate filers.)
The Schedule M1SA instructions will include a worksheet to walk taxpayers through this calculation.
Schedule M1M Income Additions and Subtractions.
(M1M – Line 1) Increased Standard Deduction for Married Taxpayers: The increased federal standard deduction for married taxpayers was made permanent. For Minnesota purposes, married taxpayers who claim the standard deduction must enter an addition to their income on Schedule M1M.
(M1M – Line 3) Personal and Dependent Exemption Phase Out: Taxpayers with higher incomes also 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 Minnesota 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.
Differences in tax credits for individuals.
(M1CD) Child and Dependent Care Credit: The higher amounts of child care expenses that may be claimed for this federal credit were permanently extended. Those amounts are $3,000 for one qualifying child and $6,000 for more than one qualifying child. And the maximum percentage of expenses used to calculate the credit remains at 35% for federal purposes.
For Minnesota purposes, taxpayers may claim up to $2,400 for one qualifying child and $4,800 for more than one qualifying child. And the credit cannot be more than 30% of the qualifying expenses.
We have made the necessary changes for tax year 2013 to Schedule M1CD, Child and Dependent Care Credit.