Minnesota is one of only 13 states that tax Social Security income. Minnesota, North Dakota, Vermont and West Virginia tax Social Security income using an income test. Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island and Utah each have their own rules to apply a state tax to this income. Those in favor of the tax claim it brings important revenue to the state. Critics argue that retirees leave the state because of this tax.
As a result, they are pushing for reform.
A brief review of different proposals
The proposals under consideration include a complete removal of the state tax as well as an increase in the income threshold used to determine when a tax should apply. However, this is not the only debate that exists on the removal of the tax. There is also a debate about the timeline of a removal.
Some push for a complete and immediate removal while others are pushing for a slow, phase-out plan. Senator Dave Senjem of Rochester has encouraged the state to consider a 15 to 20-year plan. He notes the state is no longer competitive for seniors and the move could help to resolve this issue. However, he says Minnesota should “begin the journey” as opposed to jumping in with an immediate change.
State taxes are just one part of the equation
It is important to note that even if the state tax is removed, federal taxes may still apply. The Internal Revenue Service (IRS) uses an equation to determine if a beneficiary’s Social Security income is subject to a tax. This equation basically involves half of the Social Security payment combined with all other income. If this number adds up to more than $44,000 for a married couple filing joint tax returns, the IRS could tax up to 85 percent of the Social Security income.
