By Richard Schneider
Emeritus Professor of Accounting
Minnesota is raising the amount of tax for couples using the standard deduction. Now the Minnesota Department of Revenue does not refer to this increase as an increase in tax, just an expiration of conformance with an early 2000 federal law that negated part of the marriage penalty. Early in the Bush administration there was a push to eliminate some of the marriage penalties in the tax law. One such penalty was in the standard deduction, where two single individuals received a much higher combined standard deduction than a married couple.
The federal law did make the standard deduction for a married couple double that of an individual, along with a few other provisions that eliminated some of the other marriage penalties, not all. The Minnesota legislature and governor quickly adopted the standard deduction change as they do most federal changes that affect the calculation of Minnesota taxable income. Well this time they must have put in a sunset provision effective after about ten years, and the ten years are up. I assume the Minnesota legislature seeing a new source of revenue, which would take place without any action on their part, opted for inaction, or were just not aware this happened.
The result is if a married couple or qualifying widow(er) did not itemize but took the standard deduction, there is an add-back to taxable income of $1,950. Those filing as single or head of household have no adjustment. For Mary and I this means an increase of about $146 in our tax liability.
If you itemize your deductions, the adjustment mentioned above will not normally affect you. As usual, the total itemized deductions are reduced by the amount of state income or sales tax claimed as an itemized deduction. The state does not allow a deduction for taxes; income or sales, paid to Minnesota or any other state. The add-back for this state tax is normally limited to the point that the net itemized would not be lower than the standard deduction. For 2011, this limit for married taxpayers is increased by the $1,950.
Who is affected? Since couples who are renters or older with their home mortgages paid off, most likely use the standard deduction, they will be the ones paying the increase. Even though the increase is small, about $98 to about $153, it is annoying and reinstates a marriage penalty that had been eliminated.