The tax treatment of private retirement income and pension accounts is intended to avoid double taxation. Retirement income is generally taxed either when income is saved or paid out, or at the time of income, but not both. For example, traditional Individual Retirement Accounts (IRAs) offer pre-tax contributions and pension distributions are taxable, while contributions to Roth accounts are taxed annually and eligible distributions are not taxed. Traditional defined benefit pension plans are taxable, but retirees are allowed to recover a portion of their after-tax contributions tax-free each year, based on actuarial estimates of the contribution. In fiscal year 2020, the maximum subtraction is $5,240 for married taxpayers filing joint tax returns and $4,090 for single taxpayers. The subtraction will be phased in based on a taxpayer`s provisional income – in fiscal 2020, the exit will start at $79,480 for married couples filing joint tax returns and $62,090 for single taxpayers. The maximum and thresholds are adjusted annually for inflation. Minnesota allows a portion of a taxpayer`s Social Security benefits that are subject to federal tax to be subtracted. A taxpayer can request an exemption in addition to the federal exclusion. Taxpayers may deduct a portion of their federally taxable services up to a maximum amount set by law.

The extent to which Social Security benefits are subject to Minnesota income tax depends on the measure used. There are at least three ways to measure the extent of Social Security taxation in the state: The following Figures 4 and 5 show the different tax treatment of Social Security benefits in different states. Nine states have no income tax or a tax limited to certain types of unearned income. The states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Only a portion of Social Security benefits are subject to Minnesota income tax. Tax exclusion is the result of two distinct policies: the federal exclusion of gross income for a portion of Social Security benefits and the subtraction of Minnesota`s Social Security. In 1993, when the maximum share of taxable social security benefits was increased to 85%, the Social Security mathematician estimated that the average ratio of employee contributions to benefits received for current beneficiaries was about 4 to 5 percent. For workers entering the labour market in 1993, the actuary estimated the rate to be about 7%. The group with the highest estimated ratio of taxes paid to benefits received – single, well-paid men – was about 15%. The federal exclusion for Social Security benefits was therefore set at 15% to ensure that taxpayers with the highest ratio of taxes paid to benefits received were not taxed twice.13 The Social Security mathematician has not published updated estimates of the ratio of taxes paid to benefits received. As a result, it is not clear whether taxpayers with a high ratio of taxes paid to Benefits received are currently subject to a small amount. double taxation.

However, research by Social Security administrators suggests that just over half of Social Security recipients pay federal income tax on their Social Security benefits, and only about 72% of beneficiary families file tax returns.3 While the federal estimate of 72% of beneficiary families filing returns also applies to state tax returns, about 784,000 households in total include a Social Security Beneficiary. 4 and about 45 percent of Minnesota families that included a Social Security recipient paid state income tax on their benefits.5 Taxpayers whose provisional income is below the first-tier threshold can exclude 100 percent from their Social Security benefits. For taxpayers whose provisional income is between the first and second levels, the amount of benefits subject to federal tax is the lower of: The following tool estimates the income tax owed by the state for a taxpayer with Social Security income. The bill increased the maximum subtraction by $450 for married taxpayers filing joint tax returns and $360 for single taxpayers and heads of household. The legislature also lowered the expiry thresholds by $2,250 for married couples filing joint tax returns and $1,800 for single taxpayers and heads of household. Lowering exit thresholds did not reduce a taxpayer`s evasion — it deprived taxpayers of the benefit of increasing the maximum subtraction above the phase-out thresholds that Minnesota historically corresponded to the federal tax treatment of Social Security income. For the 1983 and earlier tax years, Social Security benefits were exempt at the federal and state levels. Beginning in fiscal year 1984, Congress taxed Social Security benefits. Minnesota initially did not comply with federal treatment, and for the 1984 tax year, the state allowed the removal of federally taxable Social Security benefits. In 1985, the state lifted the exemption and followed the federal treatment until fiscal year 2017.

The 2017 legislature introduced a state subtraction for a portion of taxable benefits as of the 2017 taxation year. Fourteen states subject at least a portion of Social Security to government taxes, one of which is expected to allow full exemption in 2022. Most states in this group (Colorado, Connecticut, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Rhode Island, and Vermont) allow federal exclusion, but offer additional deductions or exemptions to taxpayers of certain ages or below certain income levels. Table 5 describes these preferences in detail. The 2019 bus tax bill increased the maximum subtraction amounts while slightly lowering the exit thresholds.15 The CRF estimated that the increase in subtraction resulted in a decline in revenues of approximately $4.4 million in fiscal year 2019 and would reach $5.3 million in fiscal year 2023. The starting point for calculating Minnesota`s income tax is Federal Adjusted Gross Income (FAGI), a government-defined measure of income minus certain exclusions (also known as „above the line“ deductions). Any income not included in FAGI is not subject to Minnesota income tax. The state of Minnesota has a relatively simple sales tax rate and uses a flat tax rate. The tax rate consists of two parts; Much of it goes into general state funds, the rest into artistic and environmental projects. In addition to the state tax rate, there are county taxes or local municipal taxes that vary greatly depending on the jurisdiction you are in. These local tax rates would apply in addition to the state rate. Social Security benefits were exempt from federal income tax prior to 1983, when Congress taxed a portion of benefits at the federal level.

The 1983 Social Security Amendments subject up to 50% of a taxpayer`s social security benefits to federal tax from 1984. Amendments shall be subject to this treatment only the social security benefits provided for in Title II and the level 1 retirement benefits of the railways. Title II benefits are old-age, survivors` and disability benefits – they do not include supplementary security income (SSI). The Omnibus Budget Reconciliation Act of 1993 added the second step to the federal calculation, subjecting up to 85% of taxpayers` Social Security benefits to federal tax. Social Security benefits are partially taxed at the federal level, and the federal tax treatment trickles down to Minnesota`s income tax. Minnesota`s income tax uses federal adjusted gross income (FAGI) as the starting point for its state tax calculations. For taxpayers whose benefits are taxable at the federal level, FAGI includes the taxable portion of their benefits, meaning Social Security is included in the income definition that is the starting point for Minnesota income tax. Overall, about 33 percent of Social Security benefits paid to Minnesota residents are taxable, but about 62 percent of residents return with Social Security benefits, paying taxes on that income. After accounting for residents who don`t file state tax returns, about 45 percent of Minnesota households that receive Social Security benefits pay taxes on their benefits.

The Social Security Administration reported that about $15.968 billion in old-age, survivors` and disability insurance (OASDI) benefits were paid to Minnesotans in 2017.7 This means that about $3.1 billion in benefits were paid to taxpayers who did not file a tax return, likely because they did not have income tax in Minnesota. Including residents who did not file a return, about 33% of all benefits paid to Minnesota residents were subject to Minnesota income tax.