Minnesota Tax Update: Key Features of the 2013 Omnibus Tax Bill

Last month, Minnesota lawmakers passed sweeping changes to a number of areas, including individual (income, estate, and gift), business, and sales taxes as part of the Minnesota Omnibus Tax Bill (HF 677).  Signed by Governor Dayton on May 23, 2013, the new law will have significant tax consequences for Minnesotans and non-MN residents who own certain property in the state.

Individual Income Tax

HF 677 increases the top marginal income tax rate to 9.85% (from 7.85%) for MN taxpayers filing joint returns with taxable net income over $250,000.  In addition, the new legislation raises the Minnesota alternative minimum tax (AMT) rate to 6.75% (from 6.4%).  These new rates are effective retroactively beginning January 1, 2013[1].

Estate Tax

Perhaps the most significant change to the Minnesota Estate tax framework was the implementation of a 3-year lookback.  The new law modifies the filing requirements for the estate tax to provide that taxable gifts made within three years of the decedent’s death must be added to the value of the estate to determine if the estate exceeds the $1 million filing requirement[2].  This is a departure from the previous law in which no prior taxable gifts were considered when determining a taxpayer’s Minnesota estate tax filing requirement.  Although H.F. 677 states that the 3-year lookback requirement is retroactive to January 1, 2013, there remains ambiguity with respect to the law’s application to taxable gifts made prior to July 1, 2013, which is the effective date of the new Minnesota gift tax (see “Gift Tax” below).

In addition to the lookback rule, H.F. 677 also expands the reach of the estate tax on certain property owned by non-Minnesota residents.  Under the previous law, ownership interests in pass-through entities (such as a partnership or limited liability companies) were treated as intangible assets only assignable to the decedent’s state of residence.  Beginning January 1, 2013, the state of Minnesota will apply a look-through test to these pass-through entities, which means it will include the Minnesota real and tangible personal property owned by a pass-through entity in the Minnesota estate of the decedent.  If there are multiple owners of the entity, the property will be assigned to the decedent based on his or her share of the capital interest in the entity[3].

Finally, H.F. 677 makes several important clarifications and changes to the estate tax exclusion for qualifying small business and farm property enacted in 2011.  Under the prior law, the Minnesota estate tax has permitted an additional $4 million exemption/deduction for estates that include a small business or farm.  Specifically, family members who receive small business or farm property via a trust will qualify the additional deduction.  Moreover, the law now allows for a more expansive definition of “ownership” by the decedent, including property held in a revocable living trust.  These new provisions will apply retroactively to decedents dying after June 30, 201[4]

Gift Tax

HF 677 also implements a gift tax of 10% on taxable gifts of real or tangible personal property located in Minnesota made by any donor (even a non-resident) beginning July 1, 2013[5].  Minnesota will now join Connecticut as the only two states in the country that impose a state gift tax.  The new law allows taxpayers to exclude $1 million of taxable gifts and also permits an annual exclusion of $14,000 per person, per year and retains several other concepts that are similar to the federal statutes, including gift-splitting elections and marital deductions.

Other Tax Provisions

H.F. 677 includes a myriad of other tax provisions ranging from sales taxes to corporate taxes:

Sales/Use & Excise Taxes

  • Increase in the excise tax rate on tobacco products[6]
  • Increase in the motor vehicle rental tax rate to 9.2% (from 6.2%)[7]
  • Expansion of the sales and use tax base to include certain digital products transferred electronically and specified services, including repair, maintenance, warehousing, and storage services.  This also includes digital audio works, digital audiovisual works, and digital books that are transferred electronically or on tangible medium[8].

Corporate Franchise Taxes[9]

  • Repeals the special rules for foreign operating corporations (FOCs) and the exclusion for foreign royalties
  • Treats foreign entities taxed under federal law as partnerships or disregarded entities, as domestic entities
  • Excludes real estate investment trust (REIT) dividends from the dividends received deduction

Looking Forward

The new gift and estate tax provisions of H.F. 677 create a “call to action” for high net worth families who plan to make non-charitable gifts in 2013.  At a minimum, individuals with exposure to the Minnesota estate tax should consider making gifts prior to July 1, 2013, when the new gift tax provisions take effect.  In addition, non-residents of Minnesota who own Minnesota real estate or business interests should carefully review their facts and circumstances to see how H.F. 677 impacts them.

If you would like White Oaks Wealth Advisors to help you analyze the impact of this new legislation and develop strategies you may wish to consider, please contact us.

This article contains general information only and White Oaks Wealth Advisors is not, by means of this document, rendering tax or legal advice.  This document is not a substitute for professional services or advice, nor should it be used as a basis for any decision or action that may impact you or your business.  Before making such decisions, you should consult a qualified professional advisor.  White Oaks Wealth Advisors shall not be responsible for any loss sustained by any person who relies on this document.

[1] MN Statutes 2013, Section 290.091, subdivision 1 and Section 290.06,   subdivision 2c-(a)-(c), amended by H.F. 677, 116.9 and 109.2
[2] H.F. 677 Conference Committee Report, Page 28
[3 H.F. 677 Conference Committee Report, Page 29
[4] H.F. 677 Conference Committee Report, Page 29
[5] H.F. 677, 292.17
[6] H.F. 677 Conference Committee Report, Page 17
[7] H.F. 677 Conference Committee Report, Page 32
[8] MN Statutes 297a.61, subdivision 3(I), amended by H.F. 677, 149.25
[9] H.F. 677 Conference Committee Report, Page 21

About Nick Chimerakis

Sr. Planning & Tax Advisor, CPA, CFP®

Nick Chimerakis joined White Oaks Wealth Advisors in July 2012. He provides income and wealth transfer tax planning to the firm’s clients and oversees the family office accounting functions.

Nick graduated from the University of Notre Dame with a Bachelor of Arts and Bachelor...

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