INDIVIDUAL INCOME TAX Federal Update

Transcription

1 January 29, 2009 INDIVIDUAL INCOME TAX Federal Update DOR Administrative Costs/Savings Department of Revenue Analysis of S.F. 252 (Bakk) / H.F. 392 (Lenczewski) Fund Impact F.Y F.Y F.Y F.Y F.Y (000 s) The Heroes Earnings Assistance and Relief Tax Act of 2008 Make Permanent the Election to Include Combat Pay as Earned Income for the Earned Income/Working Family Credits (1/1/08) ($60) ($55) ($35) ($10) ($10) Treatment of Contributions of Military Death Gratuities to Certain Tax-Favored Accounts (Generally 6/17/08) (Negl.) (Negl.) (Negl.) (Negl). (Negl.) Suspension of Five-Year Period for Exclusion of the Gain on the Sale of a Principal Residence - Allow to Certain Peace Corps Volunteers (1/1/08) (Negl.) (Negl.) (Negl.) (Negl.) (Negl.) - Make Permanent for Certain Employees of the Intelligence Community (Generally 1/1/11) (Negl.) (Negl.) (Negl.) (Negl.) (Negl.) Special Distribution Rules for Unused Health Benefits in Flexible Spending Arrangements of Individuals Called to Active Duty (6/18/08) (Negl.) (Negl.) (Negl.) (Negl.) (Negl.) Impose Mark-to-Market Regime on Individuals Who Expatriate (6/17/08) $150 $120 $110 $90 $75 The Housing Assistance Tax Act of 2008 Exclude from Alternative Minimum Taxable Income Interest from Certain Tax-Exempt Housing Bonds (bonds issued after 7/30/08) (Negl.) (Negl.) (Negl.) (Negl.) (Negl.) State and Local Bond Interest Exemption Extended to Bonds Guaranteed by Federal Home Loan Banks (bonds issued 7/31/08 12/31/10) (Negl.) (Negl.) (Negl.) (Negl.) (Negl.) General Fund Net Impact $90 $65 $75 $80 $65 Yes X No

2 Department of Revenue January 29, 2009 Analysis of S.F. 252 / H.F. 392 Page 2 EXPLANATION OF THE BILL The bill would adopt for purposes of the Minnesota individual income tax the provisions of the federal Heroes Earnings Assistance and Relief Tax Act of 2008, Public Law , enacted June 17, Also adopted would be two provisions of the federal Housing Assistance Act of 2008, Public Law , relating to the tax-exempt status of certain bonds for housing. Three other provisions of recent federal bills would be adopted for the definition of taxable income, but the amount of the deductions would be added back to income on the Minnesota return. The provisions are The additional standard deduction for state and local property taxes. The deduction for higher education tuition and fees. The above-the-line deduction for educator expenses, up to $250. The deductions for tuition and educator expenses would be added back to adjusted gross income in determining household income for purposes of the child care credit, the K-12 education credit, and the property tax refund. Attached is a summary prepared by the Appeals and Legal Services Division. REVENUE ANALYSIS DETAIL The estimates are based on the estimates for the federal legislation prepared by the Joint Committee on Taxation. The estimates for each provision were apportioned to Minnesota based on information applicable to that provision. The estimates were adjusted for the differences between federal and state tax rates and federal and state fiscal years. sf0252(hf0392)_1/cc Source: Minnesota Department of Revenue Tax Research Division

3 2009 PARTIAL FEDERAL UPDATE BILL SUMMARY H.F. 392 / S.F. 252 Appeals and Legal Services Division Bill Date: January 26, North Robert Street Summary Date: January 26, 2009 Saint Paul, Minnesota Overview PARTIAL FEDERAL UPDATE Minnesota income and franchise tax is based on federal taxable income (FTI) for regular Minnesota tax purposes; federal alternative minimum taxable income (AMTI) for Minnesota alternative minimum taxable income; federal adjusted gross income (FAGI) for household income used for the Minnesota dependent care credit, education credit, and property tax refund; and earned income for the working family credit. Current Minnesota law references these federal concepts as amended through February 13, Since that date, Congress has enacted several bills making modifications to the Internal Revenue Code. This update adopts all of the changes made in the earliest of these bills, the Heroes Earnings Assistance and Relief Tax Act of 2008, P.L It also adopts select provisions from the Housing Assistance Tax Act of 2008, P.L , and the Emergency Economic Stabilization Act of 2008, P.L The main tax provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 enacted June 17, 2008, include: 1. The ability of members of the military to elect to use tax exempt combat pay in calculating their earned income credit (which was set to sunset after 2007) was made permanent. This affects the calculation of the Minnesota working family credit; 2. A number of changes addressing the ability of members of the military to make contributions to, or take distributions from, tax advantaged accounts, such as IRA s, 401k s, and flexible spending accounts; and 3. Certain persons with net worth over two million dollars and over $600,000 of unrealized gains, who give up their U. S. citizenship or terminate their long-term U.S. residency are subject to income tax on the net unrealized gain in their property as if the property had been sold for its fair market value on the day before the expatriation or residency termination. This is effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after June 17, The provisions adopted from the Housing Assistance Tax Act of 2008, enacted July 30, 2008 are: 1. An additional standard deduction for property taxes payable on non-business property equal to the lesser of the taxes paid or $500 ($1,000 for married filing joint filers) which is in effective for 2008 (However taxpayers will be required to add this amount back to income. See Section 3.);

4 2. An exemption from tax for interest paid from certain state or local bonds guaranteed by a Federal Home Loan Bank. This is effective for taxable years beginning after December 31, 2007 and applies to interest from bonds issued after July 30, 2008 but before January 1, 2011; and 3. An exclusion from alternative minimum taxable income for interest attributable to certain state or local bonds issued for first-time home buyers, moderate income housing and owner-occupied housing for veterans. This is effective for interest on bonds issued after July 30, The provisions adopted from the Emergency Economic Stabilization Act of 2008, enacted October 3, 2008 are: 1. The additional standard deduction enacted as part of the Housing Assistance Tax Act was extended for one year through 2009; 2. The deduction for up to $250 of educator expenses allowed in the computation of federal adjusted gross income, which was scheduled to federally sunset after 2007, was extended through 2008 and 2009; and 3. The deduction for up to $4,000 of higher education tuition expenses allowed in the computation of federal adjusted gross income, which was scheduled to federally sunset after 2007, was extended through 2008 and Taxpayers will be required to add all three of these amounts back to income. See Section 3. Section 1. Federal update to Minnesota administrative provisions. Amends Minn. Stat. 289A.02, subd. 7 to incorporate certain federal administrative provisions as defined in the Internal Revenue Code through June 17, Since the Heroes Earnings Assistance and Relief Tax Act did not amend any sections referenced in Minnesota administrative provisions, this change has no substantive effect. Effective the day following final enactment. Section 2. Minnesota net income. Amends Minn. Stat , subd. 19 to adopt all of the changes made to federal taxable income in the Heroes Earnings Assistance and Relief Tax Act, the two changes mentioned above from the Housing Assistance Tax Act, and the three changes mentioned above from the Emergency Economic Stabilization Act. Effective for taxable years beginning after December 31, Section 3. Additions to federal taxable individual income. Amends Minn. Stat , subd. 19a to require taxpayers to add to income the amount of three federal deductions (tuition expenses, educator expenses and the additional standard deduction for real property taxes paid) incorporated into the definition of net income in section 1. Also amends the addition for non-minnesota municipal bond interest by providing an exemption from income for interest from certain Minnesota municipal bonds that are guaranteed by a Federal Home Loan Bank. This change, which conforms Minnesota law to a federal change enacted in the Housing Assistance Tax Act which makes this income exempt from federal tax, is effective for taxable years beginning after December 31, 2007 and applies to interest from bonds issued after July 30, 2008 but before January 1, Section 4. Update of credits, wages and individual alternative taxable income. Amends Minn. Stat , subd. 31 to incorporate federal changes which impact Minnesota tax provisions that 2

5 are not part of the computation of regular tax. For alternative minimum tax on individuals, trust and estates, the new changes to federal adjusted gross income incorporated into the definition of net income will apply to the computation of Minnesota alternative taxable income. Similarly, the definition of income for purposes of the Minnesota dependent care credit and the education credit will adopt the same federal changes. The federal earned income credit, which Minnesota uses in part to calculate the working family credit, was amended to permit members of the military to use nontaxable combat pay to compute the credit, effective beginning with tax years beginning after December 31, Finally, the definition of wages used by employers to determine their wage withholding obligations was amended to require withholding on differential wages paid to employees who have been called to active duty military service. This change to the definition of wages was effective federally beginning with wages paid after December 31, All of these changes are effective for Minnesota purposes at the same time as they became effective federally. Section 5. Income for child and dependent care credit. Amends Minn. Stat , subd. 2a to require taxpayers to include in income the amount of tuition and educator expenses required to be added to income under the change to Minn. Stat , subd. 19a. This change will also apply to the calculation of the education credit allowed under section Effective for taxable years beginning after December 31, Section 6. Household income for the property tax refund. Amends Minn. Stat. 290A.03, subd. 3 to require taxpayers to include in household income the amount of tuition and educator expenses required to be added to income under the change to Minn. Stat , subd. 19a. Effective for taxable years beginning after December 31, Section 7. Federal update of property tax refund. Amends Minn. Stat. 290A.03, subd. 15 to incorporate the new federal changes to federal adjusted gross income mentioned above into the definition of household income used to calculate the property tax refund. Effective for property tax refunds based on property taxes payable after December 31, 2008 and rent paid after December 31, Section 8. Federal update of estate tax. Amends Minn. Stat , subd. 1 to move the date through which Minnesota incorporates the federal estate tax to June 17, This change does not have any substantive effect. Section 9. Temporary prohibition against assessing employers who fail to withhold from differential pay paid to employees who have been called to active duty military service. An amendment to the definition of wages dealing with differential pay paid to employees who have been called to active duty military service became effective federally for wages paid after December 31, The change to the definition of Minnesota wages in section is also effective for wages paid after December 31, However, in this uncodified provision, the Department of Revenue cannot assess tax, penalty or interest against an employer who fails to withhold from differential pay on wages paid before January 1, Effective the day following final enactment. Section 10. Alternative minimum taxable income exclusion for housing bonds issued by Minnesota. An uncodified provision will allow taxpayers to exclude from alternative minimum taxable income the interest attributable to certain Minnesota bonds when the bond proceeds are used for first time home buyers, moderate income housing and owner occupied housing for veterans. 3

6 This change, which conforms Minnesota law to a change enacted as part of the Housing Assistance Tax Act (which makes this income exempt from federal alternative minimum tax), is effective for taxable years beginning after December 31, 2007 and applies to interest from bonds issued after July 30,