The Minnesota Legislature passed the Omnibus Tax Bill on May 20, 2013, and Governor Dayton signed it into law on May 23, 2013. The tax bill significantly affects taxpayers and their estates by enacting a gift tax and amending the estate tax and income tax.
Among the most significant elements of the Omnibus Tax Bill is the reintroduction of a Minnesota gift tax 34 years after the prior gift tax was repealed. The tax, which becomes effective for gifts made after June 30, 2013, will apply to all gifts made by Minnesota residents and to nonresidents’ gifts of Minnesota real estate and tangible personal property customarily kept in Minnesota. While the federal lifetime exemption for gifts is currently $5,250,000 (adjusted for inflation), the Minnesota lifetime exemption is $1,000,000 (and not adjusted for inflation). Gifts in excess of the $1,000,000 lifetime exemption will be subject to a flat 10 percent tax. The Minnesota gift tax incorporates the federal annual exclusion from gifts (currently $14,000 per donee) and the generally unlimited deductions for gifts to a U.S. citizen-spouse or qualified charities.
Given that this new tax becomes effective on July 1, 2013, we encourage you to contact your advisors as soon as possible if you have been contemplating making substantial gifts. We anticipate that gifting to avoid the imposition of the new Minnesota gift tax will be of particular interest to individuals who have not yet taken full advantage of their $5,250,000 federal gift tax exemption.
The Omnibus Tax Bill revised the Minnesota estate tax to correspond to the addition of the Minnesota gift tax. Now, if the sum of a decedent's estate and his or her taxable gifts exceeds $1,000,000, a Minnesota estate tax return must be filed and gifts in excess of the annual exclusion made within three years of a decedent's death will be added to his or her estate for Minnesota estate tax purposes.
The Omnibus Tax Bill also expands the reach of the Minnesota estate tax to include certain assets held by nonresidents. The tax bill provides that Minnesota estate tax will now be imposed upon nonresidents who own interests in "pass-through" entities to the extent that those pass-through entities hold real or personal property located in Minnesota at the time of the decedent's death. Pass-through entities are defined to include S corporations, partnerships and other entities taxed as partnerships (including LLCs), single member LLCs, and trusts that are includable in the decedent's taxable estate.
This new law is effective for decedents who die on or after January 1, 2013. This statute is potentially far-reaching and the mechanics of the tax calculation are unclear because the Department of Revenue has provided minimal guidance regarding the administration of the tax. However, if you are a nonresident who has interests in an S corporation, LLC, or trust that holds Minnesota real estate or personal property, we suggest that you consult legal or tax advisors regarding how this law may affect the taxation of your estate.
Effective for tax years beginning on or after January 1, 2013, the Omnibus Tax Bill adds a new fourth tier income tax bracket. A new 9.85 percent income tax bracket will apply to single filers with taxable income in excess of $150,000 and married joint filers with taxable income in excess of $250,000. The new 9.85 percent income tax bracket will also be applied to trusts and estates with taxable income in excess of $125,000.
One closely watched income tax proposal did not survive the legislative session: the proposed “snowbird tax,” which would impose Minnesota income tax on nonresidents who spend at least 60 days in Minnesota (as opposed to the current 183 day measurement), was not included in the final Omnibus Tax Bill.
The U.S. Treasury Department requires us to advise you that this written advice is not intended or written by our firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Written advice from our firm relating to federal tax matters may not, without our express written consent, be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer, other than the recipient of the written advice.