Minnesota Retirement Tax Friendliness

Minnesota Retirement Taxes

If warm winters or low taxes are a priority for your retirement, Minnesota probably isn’t the state for you. It is one of the few states that taxes Social Security income. It also taxes other forms of retirement income while providing no deduction or exemption for seniors.

In other words, if you’re a retiree in Minnesota expect to pay taxes on your retirement income at rates from 5.35% to 9.85%. Sales taxes in the Land of One Thousand Lakes are relatively high, while property taxes are close to average.

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Is Minnesota tax-friendly for retirees?

Minnesota taxes Social Security income and most other forms of retirement income. Income tax rates in Minnesota are among the highest in the country, ranging from 5.35% to 9.85%.

Meanwhile, its sales and property taxes are not particularly low. The total state and average local sales tax rate is 7.49%, according to the Tax Foundation. The median effective property tax rate is 1.10%, close to the national average of 1.01. Minnesota also has an estate tax.

Is Social Security taxable in Minnesota?

Any Social Security income that is included in adjusted gross income (AGI) on your federal tax return will be subject to income tax in Minnesota. That income, in combination with any work income and all other retirement income, will be taxed at the rates shown in the table below. However, the state does allow seniors to subtract a portion of their Social Security benefits from their income. 

Married couples filing jointly can subtract up to $5,840 in benefits if their provisional income is less than $88,630. Married couples filing jointly lose the ability to subtract a portion of their benefits if their provisional income exceeds $100,000. Single filers and heads of household can subtract up to $4,560 if their provisional income is less than $69,250 but lose that ability once their income exceeds $78,000. Married couples filing separately can subtract up to $2,725 if their provisions income is less than $44,315 but lose that ability when their provision income exceeds $50,000. 

Are other forms of retirement income taxable in Minnesota?

All other retirement income is taxable in Minnesota. However, the state offers a subtraction to retirees with public pensions who did not earn Social Security credits and do not receive Social Security benefits. These retirees can qualify for a $12,500 subtraction ($25,000 for married couples filing jointly and surviving spouses). All other retirement income you receive while living in Minnesota will be taxed at the rates outlined in the table above.

How high are property taxes in Minnesota?

Minnesota property taxes are close to the national average. The typical Minnesota homeowner spends below $2,767 annually on property taxes. The state’s average effective property tax rate is 1.02%, which is just above national marks.

What is the Minnesota senior citizens property tax deferral program?

The Minnesota senior citizens property tax deferral program is a form of property tax relief available to seniors below a certain household income threshold. To qualify, you must be age 65 or older with a household income of $96,000 or less.

Homeowners who are enrolled in the program pay a maximum of 3% of their household income on property taxes each year. The state pays any remainder on your behalf. However, that excess tax amount is deferred and must eventually be paid back with interest. This is typically done with the proceeds of an eventual home sale.

How high are sales taxes in Minnesota?

The statewide sales tax rate in Minnesota is 6.88%. That's the sixth-highest statewide rate in the U.S. Additionally, cities and counties can collect their own taxes of up to 2%. On average, the total rate in Minnesota is 7.49%.

Those rates do not apply to all items, however. Most groceries and most types of clothing are exempt from the sales tax in Minnesota. All medicine, including both prescription and non-prescription drugs, is exempt from sales tax.

What other Minnesota taxes should I be concerned about?

Seniors who intend to leave any property or wealth to their loved ones may be affected by the Minnesota estate tax. The exemption on that tax increased to $3 million starting on Jan. 1, 2020. Estates with a value below the exemption amount will not be taxed. Tax rates for estates above that exemption range from 13% to 16%.