House Taxes Committee approves standard deduction cleanup

Ope, gotta fix that.

It turns out that a provision in the 2023 tax law inadvertently reduced the standard individual income tax deduction by undoing the inflation adjustments instituted since 2019. That would have increased taxes for most Minnesota filers using the standard deduction.

But, as amended and further amended, HF2757, sponsored by House Taxes Committee chair, Rep. Aisha Gomez (DFL-Mpls), would adjust the standard deduction amounts for tax year 2023. In other fixes, it would align the definition of “Tribal Nation” in statewide local housing aid with the wording in the Tribal Nation aid program, and allow a 0.625% local sales and use tax authorization for Beltrami County approved by voters in November.

At Monday’s first committee meeting, the bill was approved and referred to the House Ways and Means Committee, where it is scheduled to be heard Wednesday.

Under the fix, the standard deduction amount for tax year 2023 would be $27,650 for married joint or surviving spouse filers, $20,800 for head of household filers, and $13,825 for all other filers.

The additional amount for seniors or blind taxpayers would be $1,450, or $1,850 for a taxpayer who is not married or a surviving spouse. The dependent standard deduction amount would be limited to the greater of $1,200 or the individual’s earned income plus $350. Those amounts would be adjusted for inflation beginning in tax year 2024.

Revenue Commissioner Paul Marquart said it will cost taxpayers if the law isn’t corrected.

“If you’re a married joint filer, you’re going to lose about $3,400 of deductible income,” he said. “So if you’re at a 5.35% rate [of taxation], it would be about $185 extra if this was not corrected, all the way to, if you’re at a rate of 9.85%, it would be $340.”

Several Republicans voiced displeasure that another proposed correction was not in the bill.

Gomez and the Senate Taxes Committee chair, Sen. Ann Rest (DFL-New Hope), sent a June letter to Marquart and Jim Schowalter, then-commissioner of Minnesota Management and Budget, saying that the 2023 tax law would inadvertently make effective for tax year 2023 new limitations in the deduction for a business’ net operating loss, reducing them from 80% to 70% of taxable net income. They wrote that it was intended to be effective for tax year 2024.

Rep. Greg Davids (R-Preston) proposed, then withdrew, an amendment to include that change in this bill, but Gomez stated her intention to address that change in a separate bill in the coming months.