Minnesota has a New Social Security Income Subtraction

As part of the Minnesota Omnibus Tax Bill that was signed into law in May 2017, Minnesota now has a subtraction from income for certain Social Security and Tier 1 Railroad Retirement benefits. The maximum subtraction is $4,500 for married/joint filers and surviving spouses. The maximum subtraction is $3,500 for single and head-of-household filers. The maximum subtraction is $2,250 for married/separate filers.

The subtraction is phased out as “provisional income” exceeds certain thresholds.

Provisional income, for these purposes, is defined as “modified adjusted gross income” under Sec. 86(b)(2) of the Internal Revenue Code, plus one-half of Social Security benefits received. Modified adjusted gross income does not include taxable Social Security, so provisional income will always include half of a taxpayer’s Social Security, regardless of how much is taxable. Modified adjusted gross income also adds back certain other deductions, such as the student loan interest deduction, the higher education tuition deduction, and the domestic production activities deduction. Tax-exempt interest is also added back in determining modified adjusted gross income.

For married/joint filers and surviving spouses, the maximum subtraction is reduced by 20 percent of provisional income of more than $77,000. For single and head-of-household filers, the threshold is $60,200, and for married/separate filers, it is $38,500. These phase-out thresholds and the maximum subtraction amounts are to be adjusted for inflation in future years.

The subtraction is reported on Schedule M1M, which is being revised for 2017 to accommodate some of the changes arising from the Minnesota Omnibus Tax Bill. The instructions for the 2017 Schedule M1M contain a worksheet where the amount of the subtraction is calculated. At the end of the worksheet, the computed amount is compared to the amount of Social Security received that is taxable for federal purposes (line 20b of the federal Form 1040). The lesser of these amounts is the new subtraction for Minnesota tax purposes.

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