ST. PAUL, Minn. - Gov. Mark Dayton signed a bill into law Friday evening that will provide tax relief to hundreds of thousands of Minnesotan, by providing new deductions they can claim on this year's tax returns. It will also repeal controversial sales taxes on some business services.
The $434 million tax-relief bill passed both houses by overwhelming margins, receiving bi-partisan support. But Republicans in the House and Senate used the debate to chastise the Democrats for trying to hold onto too much of the projected budget surplus.
Dayton praised the legislative leaders for moving the bill through the process quickly, in time to still help the 50 percent of Minnesotans who haven't filed their tax returns yet. Earlier in the week he chastised them for not moving quickly enough, but in a matter of days the Senate wrapped up its work.
The vote would've come a day sooner, but Republican lawmakers said they needed to more time to study the bill's details and look for hidden surprises.
Advice for taxpayers
Revenue Commissioner Myron Frans advised taxpayers who haven't filed yet to wait until after April 1 to file their taxes if they believe they will use one of the deductions (see list below). This will give the Dept. of Revenue staff time to update the tax code and tax preparation software to reflect the new deductions.
Frans said roughly 50 percent of taxpayers, or 1.4 million filers, haven't submitted returns yet. Others who's already filed will be notified by the Dept. of Revenue if it appears they'll benefit from filing an amended return.
The commissioner cautioned against filing an amended return immediately, because in some cases the agency's staff can still adjust those returns and apply the new deductions.
Many of those deductions will apply to 2013 taxable income, while one of the largest -- the marriage penalty fix -- won't apply until the 2014 tax year. Democrats said it would cost the state too much revenue to apply that tax break to 650,000 households this year. And the though it would be too taxing for the department to adjust that many tax returns.
Half of the surplus
Tax relief bill will use $432 million of the state's projected $1.2 billion surplus for tax relief, plus transfer $150 million to rainy day reserves. This adds up to $582 million, or roughly half of the surplus forecast for this two-year budget cycle.
The projected impact on taxpayers is $508 million in savings, a number that may very depending on how many people tap into the new deductions.
Frans explained that the department has been giving a wide range, by saying 350,000 to 500,000 are likely to benefit from these deductions or new tax credits.
"The situation really depends upon how many people really qualify," Frans told reporters.
"For example with the Working Family Credit, those income levels are hard to predict, and how many people will actually take advantage of it isn't known yet."
The Working Family Tax Credit, which was expanded by 25 percent in the tax-relief bill, is a negative income tax. In other words cash refunds for lower income families that don't earn enough to owe taxes at the end of the year.
Those with incomes between $10,000 and $45,000 can qualify for that tax credit depending on family size. It's similar to the federal Earned Income Tax Credit.
Tax bill Basics
Biz-to-biz taxes: Half of the tax relief is from repealing sales taxes on warehouse services, telecommunications services and business equipment repair services, all taxes passed last year as an effort to broaden the tax base. The warehousing bill is set to go into effect in April, prompting Republicans to ask for a special session last fall to repeal it sooner.
Tax Deductions: The other half of the tax relief total comes from new tax deductions created by bringing Minnesota's deductions in line with federal deductions, also known as tax code conformity.
These are some of the key tax deductions and exemptions effective for Tax Year 2013:
- Mortgage insurance premiums deduction (80,000 families affected according to House research)
- Employer-provided adoption assistance exclusion (unknown number)
- Employer-provided tuition assistance exclusion (unknown number)
- Student loan interest deduction (125,000 affected)
- Higher education tuition deduction (30,000 affected)
- Educator out-of-pocket classroom expenses deduction (60,000 affected)
These are some key tax deductions and credits in the tax-relief bill that go into effect in Tax Year 2014:
- Marriage Penalty fix (650,000 families affected)
- Dependent Care Credit (26,000 affected)
Other highlights include:
- Working Family Tax Credit expanded by 25 percent (330,000 families affected)
- Estate Tax threshold rises from $1 million to $5 million over a 5-year period.
- Repeal of the gift tax