What three of the Minnesota Legislature's biggest income tax changes mean for taxpayers

Minnesota Democrats' tax bill, which was signed into law last month, is historic — in a few ways.

The $3 billion package of tax cuts is the largest in state history and includes one-time rebates, a cut in taxes on Social Security benefits and a new credit for low-income families that supporters hope will slash childhood poverty rates in the state.

The proposal also includes the largest tax hike in the history of the state, raising $1 billion over the next two years, largely from corporations and wealthier Minnesotans.

We've broken down three of the biggest changes to Minnesota income tax in the bill that could lower or raise the amount you owe and included a calculator to plug in your information. Note that these calculators are designed to demonstrate the effects of the new income tax laws. Do not use them to actually prepare your taxes. Data entered into these calculators is not stored.

New child tax credit

For lower-income taxpayers with children, legislators created a Minnesota Child Tax Credit this year. The credit is worth a flat amount — $1,750 — per child, with no cap on the number of children it can apply to. It replaces a somewhat more complicated formula that was part of the Minnesota Working Family Credit that provided different amounts depending on how many children a taxpayer had.

The Working Family Credit has not gone away, however. It still provides a credit to many low-income families, including those without children, and some money for children living at home who reached the age of 18 during the year, or are students over 18 living at home (these older children are not eligible for the child tax credit).

In the case of both credits aimed at lower-income taxpayers, the credits are reduced as incomes rise. Even though they are separate credits, this reduction or "phase-out" happens together, at a rate of 12% of total income over a certain threshold: $35,000 for married taxpayers filing jointly or $29,500 for single filers.

That means, for example, that a couple with two kids would receive the maximum credit — $3,850 — up to $35,000 of income, but would see a smaller credit if their income were higher than that. The credit ends at $67,083 of income.

The Minnesota Child Tax Credit and the Minnesota Working Family Credit are both refundable credits, so if the amount of the credit is greater than the amount of tax owed, the taxpayer will receive the difference back.

The calculator below shows how much this credit would be worth for a married couple, filing jointly with two children and $45,000 in income. It also shows the amount the same couple would have received from the Minnesota Working Family Credit alone in 2023 if lawmakers hadn't created the new credit. You can change the numbers in the calculator to see the effect of different income and family situations.

Minnesota Child Tax Credit calculator

Social Security benefits taxed less

Despite calls from some to eliminate state income taxes on Social Security benefits in 2023 and beyond, some of these benefits will continue to be taxed. The Legislature did, however, change the law so that Social Security benefits won't be taxed as much.

The way Social Security benefits are taxed federally and in Minnesota is complicated. Basically, a large portion of Social Security benefits are exempt from federal income taxes and also not taxed in Minnesota. For the portion of benefits that are subject to federal tax, Minnesota law creates a special subtraction so that some of those benefits are not taxed in the state. The amount of the subtraction varies according to a taxpayer's overall income.

This session, legislators simplified the formula for calculating the subtraction. In essence, the law now says that for couples (married, filing jointly) earning $100,000 or less, their federally taxable Social Security benefits can be fully subtracted from their taxable state income — that is, they will pay no state income tax on their Social Security benefits. Beyond that threshold, the amount of the subtraction is reduced by 10% for every $4,000 in gross income. That means that a couple earning more than $136,000 pays state tax on all of their federally taxable benefits, at least according to this formula.

But that might not be the final word for all taxpayers, because legislators also preserved the previous formula for calculating the Social Security subtraction. The math for that one involves calculating what's called "provisional income" by totaling up other income sources and half of Social Security benefits, and then reducing a fixed subtraction by a set rate as provisional income exceeds certain thresholds. Whew.

The calculator below shows how this works. To figure out the amount of federally taxable Social Security benefits that would not be taxed in Minnesota under the new formula — the number displayed on the left — enter your adjusted gross income and total taxable Social Security benefits. If you want to compare this to the amount of the subtraction using the old formula, you'll need a bit more information: total income, total Social Security benefits and some specifics from IRS form 1040 like non-taxable interest and other income adjustments. Whew again.

For example, consider a couple with $39,000 in Social Security benefits and $30,000 in other income and federal adjusted gross income of $40,675. Federally, $10,675 of their Social Security benefits are taxed. Under previous law, they would have had a Social Security subtraction of $5,840, meaning that they would pay state income tax on $4,835 of their benefits. Under the new law, since their adjusted gross income is under $100,000, all of their federally taxable benefits are exempt from state income tax, so they do not pay any state income tax on their Social Security benefits.

The Social Security subtraction reduces a taxpayer's taxable income, so a bigger subtraction generally means that person will owe less tax. But the actual amount the taxpayer owes is determined by additional factors that are beyond the scope of this calculator.

Social Security subtraction calculator

High-income deductions limited

The two tax cuts above will reduce the amount of income taxes the state collects. But the Legislature also raised taxes in a few ways, and the largest related to the income tax expands the limitation on deductions that high-income taxpayers can claim.

You're probably familiar with deductions: the standard deduction reduces taxpayers' taxable income by a certain amount, or itemized deductions allow taxpayers to total certain types of spending — such as donations to charities — and reduce their taxable income by that amount.

In either case, taxpayers who earn slightly more than $200,000 are not allowed to claim the full amount of these deductions; they are reduced according to a formula. Under previous law, the reduction was only 3% of income in excess of the threshold, or 80% of total deductions — whichever number was smaller.

Now, income between $220,650 and $304,970 reduces a taxpayer's deductions by 3%, but any income above $304,970 reduces a taxpayer's deductions by 10%. The 80% of total deductions rule still applies. But there's also a new rule: for taxpayers with adjusted gross income in excess of $1,000,000, their deductions are simply reduced by 80% — no more math needed.

The calculator below shows these numbers for taxpayers (married, filing jointly) with $350,000 in income who took the standard deduction of $25,800. Under previous law, they could have claimed a $21,920 deduction. Under the new law, their deduction is limited to $18,767. You can change the numbers in the calculator to see the effects of different tax situations.

Since this law reduces the amount of deductions a taxpayer can claim, that person will have higher taxable income and pay more tax. But the exact amount that tax bill will go up is determined by other factors outside the scope of this calculator.

High-income deduction limitation calculator