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One of the last states to act on conforming its state income tax to the 2018 Tax Cuts and Jobs Act (TCJA), Minnesota’s governor signed legislation to do so on May 28, 2019. See H.F. 5. The new law is retroactive to the beginning of 2018, so Minnesota taxpayers who filed 2018 state returns based on the old law may have to amend them.
The new law was designed to produce “net zero” spending, meaning that revenues raised by conformity are offset by tax relief. The law is estimated to reduce revenue from individual taxes by some $530 million. It does so by conforming to the increased federal standard deduction, by increasing the state’s social security subtraction, expanding the working family tax credit, and reducing the second-tier tax rate from 7.05% to 6.8%.
The law also changes the starting point for Minnesota tax computations for individuals from federal taxable income to federal adjusted gross income. All individual tax changes from the TCJA are adopted unless the state specifically decouples from them. Consequently, moving expenses are no longer deductible in Minnesota, and employer payments or reimbursements of those expenses are taxable. Minnesota’s action reduces the number of states in which moving expense payments/reimbursements remain excludable in 2019 to seven: Arkansas, California, Hawaii, Massachusetts, New Jersey, New York, and Pennsylvania.
Also, deductions for state and local taxes are capped at $10,000, and home mortgage interest is only deductible on debt up to $750,000.
However, Minnesota departed from the new federal law in one instance relevant to mobility. The TCJA eliminated miscellaneous itemized deductions, which prevents employees from deducting employment-related expenses such as home offices and unreimbursed travel expenses. Although the new Minnesota law does conform in general to the suspension of miscellaneous itemized deductions, it makes an exception for unreimbursed employee expenses such as those mentioned, which remain deductible to the extent they exceed 2% of adjusted gross income.
As of the end of June, new Minnesota tax returns had not yet been published, and the Minnesota Department of Revenue had advised taxpayers to wait for further instructions before seeking to amend previously filed returns.
How This Impacts Mobility
Worldwide ERC® members will now need to decide whether to gross up for payments or reimbursements of moving expenses for Minnesota employees in 2019, and whether to entertain requests for retroactive gross-ups for such payments made in 2018 and not grossed up.
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