Minnesota Tax Law - not that progressive
Feb. 20th, 2019 12:46 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
dreamsharktldr; Minnesota tax law is not kind to retirees, and is nowhere near as "progressive" as it claims to be.
The 1099 from my brokerage account finally arrived yesterday, and I plugged it into my tax software immediately. I need to get an idea how much I owe so I can figure out how I'm going to pay it when I file in April. For the 3rd year in a row I was baffled to discover that my Minnesota tax bill was higher than my Federal tax. The lowest tax brackets (where my income falls) are 10-12% for Federal tax but only 5.5% for Minnesota. So my Fed tax should be about twice my MN tax, not 10% LESS. So, WTF??
This year I decided to figure it out, and after about 3 hours of digging around I finally realized what was going on. It turns out that Federal tax law is far more progressive than I realized and Minnesota is pretty much "screw the poor." Or anyway, the sort of poor. If you're too poor to have retirement savings, the rest of this will be of no interest to you and you can go back to complaining about the wide, flat, Minnesota tax brackets.
I poked around in the H&R Block software FAQ, got a hint, pursued it down the halls of Google, and finally unearthed the surprising answer. Most people are probably dimly aware that Capital Gains income is taxed at a lower rate than other income. This is invariably portrayed by the media as a "Tax Break For The Rich." But it's not only rich people that have capital gains income. If you own mutual funds, as most people who have managed to amass any retirement savings do, you almost certainly have Capital Gains income (and maybe even the more esoteric Qualified Dividend income). In my case, 2/3 of the income from my investment account is in those categories. Not because I'm so smart, but because my broker is. Anyway, it turns out that while The Rich do get a tax break on that type of income, The Poor get an even bigger one, at least from the Feds. In fact, if you are in the lower 2 Federal tax brackets, you pay 0% tax on Capital Gains and Qualified Dividends! Minnesota, on the other hand, appears to tax everything as ordinary income. I never noticed this before because when I was working most of my income came from salary. But as a retired person, most of my taxable income is from retirement savings, so it's very noticeable.
Incidentally, this has nothing to do with last year's new tax law (I refuse to call it a Tax Cut). This 0% tax for lower incomes did not change significantly between 2017 and 2018.
The 1099 from my brokerage account finally arrived yesterday, and I plugged it into my tax software immediately. I need to get an idea how much I owe so I can figure out how I'm going to pay it when I file in April. For the 3rd year in a row I was baffled to discover that my Minnesota tax bill was higher than my Federal tax. The lowest tax brackets (where my income falls) are 10-12% for Federal tax but only 5.5% for Minnesota. So my Fed tax should be about twice my MN tax, not 10% LESS. So, WTF??
This year I decided to figure it out, and after about 3 hours of digging around I finally realized what was going on. It turns out that Federal tax law is far more progressive than I realized and Minnesota is pretty much "screw the poor." Or anyway, the sort of poor. If you're too poor to have retirement savings, the rest of this will be of no interest to you and you can go back to complaining about the wide, flat, Minnesota tax brackets.
I poked around in the H&R Block software FAQ, got a hint, pursued it down the halls of Google, and finally unearthed the surprising answer. Most people are probably dimly aware that Capital Gains income is taxed at a lower rate than other income. This is invariably portrayed by the media as a "Tax Break For The Rich." But it's not only rich people that have capital gains income. If you own mutual funds, as most people who have managed to amass any retirement savings do, you almost certainly have Capital Gains income (and maybe even the more esoteric Qualified Dividend income). In my case, 2/3 of the income from my investment account is in those categories. Not because I'm so smart, but because my broker is. Anyway, it turns out that while The Rich do get a tax break on that type of income, The Poor get an even bigger one, at least from the Feds. In fact, if you are in the lower 2 Federal tax brackets, you pay 0% tax on Capital Gains and Qualified Dividends! Minnesota, on the other hand, appears to tax everything as ordinary income. I never noticed this before because when I was working most of my income came from salary. But as a retired person, most of my taxable income is from retirement savings, so it's very noticeable.
Incidentally, this has nothing to do with last year's new tax law (I refuse to call it a Tax Cut). This 0% tax for lower incomes did not change significantly between 2017 and 2018.
no subject
Date: 2019-02-26 12:01 am (UTC)