If you retire in Minnesota, your income, including pensions, is generally subject to state income tax at rates that range from 5.35 percent up to 7.85 percent, depending on your tax bracket. Railroad retirement income is exempt from state income tax in Minnesota. If you are 65 or older or disabled and you have adjusted gross income below a certain amount, you can subtract part of your income.
Social security and railroad retirement
Social security benefits are taxable in Minnesota to the same extent they must be included on your federal tax return. Railroad retirement benefits are not taxable in Minnesota. This includes railroad unemployment and sick pay. If you had to include any of these benefits on your federal tax return, you can subtract them on your Minnesota return.
Subtraction for age 65 or older or disabled
If you are age 65 or older, or totally and permanently disabled, you may be able to subtract a portion of your income on your Minnesota return if your income is below a certain limit. The limits are adjusted gross income of not more than $42,000 if married filing jointly and both spouses are 65 or older or disabled, $38,500 if married filing jointly and one spouse is 65 or older or disabled, and $33,700 if you are 65 or older or disabled and file as single, head of household, or qualifying widow(er). If you qualify, this subtraction is calculated on Schedule M1R.
Interest and dividends on government obligations
Interest income from state and local municipal obligations outside Minnesota is not taxable on your federal return but has to be added back on your Minnesota return. But interest from municipal bonds or other obligations in Minnesota is exempt from Minnesota state income tax.
Interest on federal government obligations such as U.S. savings bonds, or Treasury bills or notes that you included on your federal return can be subtracted on your Minnesota. This includes income from mutual funds that invest in U.S. government obligations. But it does not include interest or dividends you received on Government National Mortgage Association bonds (Ginnie Maes), Federal National Mortgage Association bonds (Fannie Maes), or Federal Home Loan Mortgage Corporation bonds (Freddie Mac).
Lump sum distributions
For federal income tax purposes you could elect to have the capital gain portion of a lump sum distribution from a retirement or profit-sharing plan taxed at 20% by filing federal Form 4972. In Minnesota the capital gain portion of a lump sum distribution is taxed as ordinary income at the tax rates in effect for your bracket.
Gain from the sale of farm property
If you sold your farm property and had a gain, you may be able to reduce your gain for Minnesota income tax purposes if your debts were more than the fair market value of your assets immediately before the sale. To qualify for this reduction, you must have owned and operated the farm, you must have included the gain from the sale on your federal tax return, and you must have used the proceeds from the sale to pay down the mortgage, contract for deed, or lien on your property.
The amount of the reduction is difference between the amount of your debts before the sale, minus the amount of debt forgiveness you could exclude from income on your federal tax return, and the fair market value of your assets immediately before the sale, or the gain on the sale, whichever is less.
If you did not itemize deductions on your federal tax return and you made charitable contributions of over $500 that would have qualified to be deducted on your federal return, you can claim a deduction for 50% of the amount of the contributions over $500 on your Minnesota return.
Individual Income Tax Forms and Instructions – Minnesota Department of Revenue
Schedule M1M – Income Additions and Subtractions – Minnesota Department of Revenue
Schedule M1R – Age 65 or Older / Disabled Subtraction – Minnesota Department of Revenue
Some states try to retain retirees with tax incentives … not Minnesota – Gray Times
Taxes by State – Minnesota – Retirement Living Information Center