Significant federal tax law changes have become the norm in the last couple of years—from the Tax Cuts and Jobs Act, to the CARES Act, as well as the American Rescue Plan Act. Needless to say, it’s hard to keep them all straight. Complicating matters even more, Minnesotans need to stay up to date on the federal tax laws to which our state conforms.
The Minnesota legislature’s most recent special session ended in the wee hours of July 1st, 2021, resulting in a much-awaited omnibus tax bill. The bill contained multiple aspects of conformity to federal tax law. The most significant of those aspects are discussed below.
Perhaps the most highly anticipated part of the new bill was the PPP loan forgiveness being excluded from taxable income. Prior to the bill, PPP loans that were forgiven were tax-free for federal taxes, but the forgiveness was treated as taxable income for Minnesota taxes. The bill now fully conforms Minnesota to the federal law so that loan forgiveness is tax-free for both federal and Minnesota (also note that expenses paid for from PPP loan proceeds are deductible for both federal and Minnesota).
One component of the CARES Act allowed up to $100,000 of distributions from a retirement account free from the 10% early withdrawal penalty if the distribution was for coronavirus-related circumstances. The tax from the withdrawal could then be paid over the three following years. Although Minnesota doesn’t assess a 10% penalty on early retirement account withdrawals, the withdrawals are still subject to Minnesota income tax—an important note for tax planning. Minnesota’s new tax bill now conforms to the federal rules and allows the Minnesota income tax to be paid over a three-year period.
The American Rescue Plan Act made the first $10,200 of unemployment compensation tax free for 2020 federal taxes. Minnesota originally didn’t conform to this rule and taxed 100% of unemployment compensation. This changed with the passing of the tax bill. Minnesota now fully conforms with federal law, excluding the first $10,200 of unemployment compensation from Minnesota taxable income for 2020.
These conformities to the federal laws are a relief to Minnesota taxpayers, but what if your 2020 Minnesota tax return was already filed without Minnesota conforming to PPP loan forgiveness or unemployment compensation? The Minnesota Department of Revenue’s advice is to wait. They will review 2020 tax returns that didn’t conform to these federal changes and, depending on the complexity of the return, will either adjust the return and issue a refund or ask the taxpayer to amend the return.
If you already filed your 2020 Minnesota tax return and paid the full amount of Minnesota income tax on an early withdrawal from your retirement account, talk to your certified tax preparer about filing an amended return if you wish to pay the tax over a three-year period instead.