Federal law changes enacted through December 31, 1997, were adopted for Minnesota income tax purposes. There were a number of significant federal provisions concerning IRAs and capital gains which affect the taxable income of Minnesota taxpayers.
The income limits for phasing out the traditional IRA deduction are increased over ten years from the current phase-out beginning at $40,000 (on joint returns) for tax year 1997 to a phase-out beginning at $80,000 in tax year 2007. Two new IRA programs, the Education IRA and the Roth IRA, were added effective for 1998 tax returns. Contributions to the Education and Roth IRAs are not deductible, but distributions from these IRA accounts are tax-exempt if the following requirements are met: for the Education IRA, $500 may be contributed per beneficiary; the contribution must be made before the beneficiary turns 18, and the distributions must be made for higher education expenses. For the Roth IRA, $2,000 per year may be contributed, less any contribution to a regular IRA (subject to the regular IRA phase-out). Distributions from the Roth IRA are not taxable after five years if the distribution is made after the taxpayer reaches age 59½, dies, becomes disabled, or uses the distribution for a first-time home purchase.
The exclusion of capital gain on the sale of a principal residence was broadened significantly. Under prior law, a taxpayer was allowed a one-time exclusion of up to $125,000 of gain on the sale of a principal residence after the taxpayer had reached age 55. The new rules allow taxpayers to exclude up to $250,000 of gain on the sale of a home after owning and using the home as a principal residence for two years. The age restriction was dropped.
The update to federal law changes is estimated to cost $14.6 million in the 1997-1999 biennium and $29 million in the 1999-2001 biennium.
The Minnesota Working Family Credit for taxpayers with children was restructured. Under prior law, the Working Family Credit was equal to 25 percent of the federal Earned Income Credit. Under the new provisions, the Working Family Credit will be calculated independently from the federal Earned Income Credit, providing additional credit to families earning between $6 and $8 per hour. This increase in the Working Family Credit is estimated to cost $4.4 million in the 1997-1999 biennium and $10.1 million in the 1999-2001 biennium.
The property tax rebate enacted by the 1997 Legislature was authorized again for property taxes payable in 1998. The rebate for homeowners and renters is once again equal to 20 percent of property taxes paid. A new provision was added that limits the amount of the rebate to $1,500 per taxpayer. The rebate is a refundable income tax credit which will be claimed on the taxpayer's 1998 individual income tax return. The cost of the rebate is estimated to be $469.3 million in the 1997-1999 biennium and $25.2 million in the 1999-2001 biennium.
Sales and Excise Taxes
The sales tax rate for sales of new farm machinery and aquaculture production equip-ment was reduced from 2.5 percent to 2 percent for sales after June 30, 1998, and to 1 percent for sales after June 30, 1999. Sales of new farm machinery and aquaculture production equip-ment are exempt from the sales tax beginning with sales after June 30, 2000. The cost of this rate reduction and exemption is estimated to be $1.7 million in the 1997-1999 biennium and $15 million in the 1999-2001 biennium.
A sales tax exemption was enacted for construction materials used in constructing or improving the Duluth Entertainment Convention Center, the Minneapolis Convention Center, and the St. Paul RiverCentre. The cost of these exemptions is estimated to be $1.8 million in the 1997-1999 biennium and $4.5 million in the 1999-2001 biennium.
Local option sales taxes were authorized for the cities of Bemidji, Detroit Lakes, Fergus Falls, Hutchinson, Owatonna, Rochester, St. Cloud, St. Joseph, Sartell, Sauk Rapids, Two Harbors, Waite Park, and Winona. The local option sales taxes will be an additional one-half percent in addition to the state sales tax rate and an additional tax of $20 on motor vehicle sales occurring within the city. These local option taxes must be approved by referendum.
The tax rates on lawful gambling were reduced by 5 percent beginning July 1, 1998. The cost of these rate reductions is estimated to be $2.7 million in the 1997-1999 biennium and $5.8 million in the 1999-2001 biennium.
The amount of the budget reserve was increased from $522 million to $622 million. If the Commissioner of Finance forecasts that additional surplus revenues will be available for the biennium, the first $200 million of the additional revenue after the budget reserve increase will be deposited in the tax reform and reduction account. The next $400 million of additional revenue will be used to pay for projects authorized using bond proceeds in the 1998 Capital Budget Bill, reducing the need for state borrowing. Any remaining additional revenue will be an undesignated balance in the General Fund.Go to next page