Minnesotax?

A couple of weeks ago, the Minnesota Legislature passed new tax legislation that, among other things, added a brand new Minnesota gift tax and expanded the applicability of the Minnesota estate tax. A summary of the entire new tax bill is here, but I wanted to highlight a few things that probably matter most to the entreVIEW audience:

Increased Income Tax Rates. In case you haven’t heard, the top rate for couples making more than $250,000 net income, or $150,000 for individuals, has increased from 7.85% to 9.85%. Since it applies retroactively to all of 2013, you can’t avoid paying that rate on the gazillions you’ve already earned this year…

Minnesota Gift Tax. Minnesota is only the second state in the entire country to implement a separate gift tax. This tax will apply to gifts made after June 30, 2013. Taxable gifts are those gifts to non-spouses over the annual exclusion amount as prescribed by the federal definition (generally), which is currently $14,000 per person. Each resident has an additional $1,000,000 lifetime exemption to use over and above the annual exclusion gifts. Gifts over the $1,000,000 exemption will be taxed at a flat 10% rate.  This is in addition to the 40% federal tax on gifts over a $5,250,000 lifetime exemption. As a result, if residents have made gifts over the $5,250,000 federal exemption, any further gifts will now be taxed at a combined 50% rate. Since, of course, the federal system and the Minnesota system differ, there are gifts that Minnesota residents make that will incur Minnesota gift tax but not federal gift tax. This new Minnesota gift tax also applies to residents of any state making gifts of Minnesota real estate or tangible property.

Estate Tax on Pass-Through Entities Owning Real and Tangible Property in Minnesota. Prior to this change in the tax law, non-Minnesota residents did not pay estate tax on assets that were held in business entities like LLCs or partnerships--even if those entities owned real estate. If the deceased was not a resident of Minnesota, it was not considered Minnesota located property. The new tax law looks through those entities to tax any real estate or tangible property (equipment, crops, etc.) held in a pass-through entity. Pass-through entities are LLCs, partnerships, some trusts and S-corporations. This change is effective for any decedents dying after December 31, 2012. This doesn’t change the application of the estate tax for Minnesota residents. Individuals owning any pass-through entity that owns any real estate or tangible property in Minnesota will now owe some estate tax to Minnesota.