Social Security tax subtraction

The Legislature spent $246 million in 2017 on a significant new tax subtraction for Social Security benefits. For Tax Year 2018, married-joint filers may subtract up to $4,700 of Social Security benefits and single filers may subtract up to $3,660 of benefits from taxable income. The subtraction is phased out based on a taxpayer’s provisional income – adjusted gross income plus one-half of Social Security benefits – so it is focused on married taxpayers earning less than about $104,000 and single filers earning less than about $80,000.

The Senate Tax Committee considered a new proposal this week to allow the full value of Social Security benefits to be subtracted from Minnesotans’ taxable income. About 357,600 tax returns would see an average $1,000 tax cut as a result of this bill, but it would cost the state nearly $800 million in the next biennium and even more in the years following, as more Baby Boomers reach retirement age.

Governor Walz has included a Social Security tax cut in his budget proposal that would increase the current subtraction amounts at a cost of about $23 million. It’s a more affordable approach that focuses the tax benefits on middle-income seniors, rather than allowing very high-earning retirees to reap the biggest benefits. Under current law, more than half of Minnesota seniors already pay no taxes at all on their Social Security income. Governor Walz’s proposal would increase this to nearly 60% of Minnesota seniors that pay no taxes on their benefits.

According to data from the Department of Revenue, there are about 746,000 Minnesota households with Social Security income. Of these, 54.4% (404,000) do not pay Minnesota taxes on these benefits because of existing exemptions and subtractions. About 90% of benefits that are taxed are concentrated in the top four highest-earning income brackets – which means that’s where the biggest share of tax relief would go if the state spent $800 million every two years to provide this exemption. Minnesota has a strong reputation of being a high-service state for retirees, providing quality health care and valuable resources to its senior citizens. Spending that much money on a tax subtraction that does not actually benefit all seniors would risk the stability of other programs that are important to Minnesota’s aging population, which is why a more targeted approach may be the better solution at the end of this legislative session. (SF 245)