“Nothing in life is for certain besides demise and taxes.” However there’s extra nuance to this saying, particularly concerning property taxes, which fluctuate considerably between federal and state ranges. Whereas federal property tax typically grabs headlines—notably with potential modifications looming in 2025—state property taxes can impression many extra households. At this time, we’re specializing in Minnesota, one in all 13 states/territories that impose an property tax.
To learn extra concerning the federal property tax and 2025 planning methods, verify this article out!
The Minnesota Property Tax – Variations from the Federal Property Tax
Minnesota’s property tax has a a lot decrease threshold than the federal property tax, with the state threshold set at $3,000,000 per individual. That is considerably decrease than the present federal threshold of $13,610,000 per individual in 2024. Whereas Minnesota’s threshold isn’t listed for inflation, requiring legislative motion for modifications, it offsets the taxable quantity equally to the federal system. For instance, in case your property is price $4,000,000, you might be taxed solely on the $1,000,000 exceeding the $3,000,000 threshold.
Minnesota’s property tax charges vary from 13% to 16% throughout 5 brackets:
Minnesota Property Tax Charges | ||
Taxable Property Worth | Marginal Price | Base Taxes Paid |
$1 – $7.1 million | 13% | $0 |
$7.1 million – $8.1 million | 13.6% | $923,000 |
$8.1 million – $9.1 million | 14.4% | $1,059,000 |
$9.1 million – $10.1 million | 15.2% | $1,203,000 |
$10.1 million and up | 16% | $1,355,000 |
One other key distinction from the federal property tax is that Minnesota doesn’t enable the combining of exemptions for spouses. The federal system permits a surviving partner to mix their unused exemption with their very own through “portability,” however Minnesota doesn’t. It’s a use-it-or-lose-it state of affairs.
Nevertheless, in Minnesota, similar to on the federal stage, one partner can switch belongings to the surviving partner with out triggering any property tax problems – that is referred to as the “limitless marital deduction.”
Minnesota affords particular deductions for certified small companies and household farms, as much as $2,000,000, which may be advantageous for eligible estates.
Planning Methods for the Minnesota Property Tax
There are a number of methods to successfully plan for the Minnesota property tax and restrict your potential future tax legal responsibility. Listed here are some methods:
- Threshold/Exemption Planning with Trusts
As talked about, in contrast to the federal property tax exemption, the Minnesota exemption isn’t a combinable tax credit score. Which means that for a married couple, the design of their property plan must be completely different to successfully use every of their potential $3,000,000 exemptions.For instance, say that Mary Tyler and Robert reside in Minnesota and have all their life. They’ve 1 grownup baby to whom they wish to depart their property. Mary Tyler and Robert have labored exhausting, lived inside their means, and made good funding selections with their wealth administration staff. Their complete web price is $5,000,000, they usually’ve been accountable of their property planning. Their property plan leaves all their belongings to the surviving partner at first demise and the stability to their baby as soon as they’ve each handed. Nevertheless, this plan has a hidden hazard because it doesn’t embody organising a Credit score Shelter Belief on the first partner’s demise.
In the future, Mary Tyler passes away. Her property is run as deliberate, and all the pieces continues in Robert’s title. As a result of Mary Tyler left all the pieces to her partner, no property tax has been triggered in Minnesota. Someday later, Robert passes away. As a result of Robert’s property is valued at $5,000,000, all the pieces above his $3,000,000 exemption is taken into account for property tax functions. In accordance with the Minnesota Division of Income’s estate tax calculator, Robert’s property would owe $260,000 in taxes. The remaining $4,740,000 was transferred to their baby.
With extra planning, Mary Tyler and Robert might have doubtlessly prevented all of the state-level taxes. The outcomes look completely different if their plan referred to as for a Credit score Shelter Belief to be funded on the first demise. At Mary Tyler’s demise, $2,500,000 would go into this irrevocable belief for Robert’s profit, and he might proceed utilizing the belongings as wanted. This additionally would cut back Robert’s web price to $2,500,000. Then, at Robert’s demise, no tax can be due as he’s underneath the brink for his property being taxable. The opposite profit to this planning is that any appreciation contained in the belief is sheltered from the property tax.
It’s vital to notice that cautious planning contains being conscious of beneficiary designations on accounts. Beneficiary designations can enable for a smoother transition of belongings at demise however may also undo any cautious threshold planning carried out in revocable trusts. Beneficiary designations override something in a Belief or Will, so even when your plan requires organising a Credit score Shelter Belief on the first demise, the beneficiary-designated belongings won’t get picked up by that cautious planning.
- Gifting
Minnesota doesn’t have a present tax, although the federal present limits apply. In 2024, the annual exclusion on the federal stage is $18,000 per recipient. If you happen to present greater than that, you need to file a federal present tax return.Nevertheless, you may exceed this quantity in a couple of methods. For instance, funds on to suppliers for certified training bills and/or certified medical bills don’t depend towards that $18,000 determine. In case you are contemplating funding 529 plans, you may fund as much as 5 years’ price of annual exclusion with out utilizing any federal exemptions.
Gifting can cut back your property’s worth over time and decrease future tax liabilities. Be conscious that presents inside three years of demise are included within the property for tax calculations.
- Altering Residence
Relocating to a state with out an property tax, equivalent to Wisconsin or Indiana, could possibly be an answer. Nevertheless, Minnesota’s guidelines for figuring out residency and taxing non-residents who personal property within the state complicate this technique.Merely leaving the state doesn’t rid you of potential property tax legal responsibility. Minnesota usually considers you a state resident when you keep your domicile for 183 days or extra. They may even have a look at your actions and words when deciding. For residents, you pay property taxes in your complete taxable property. For non-residents, there’s a multi-step course of for figuring out your property tax legal responsibility. You usually see this come up when somebody leaves Minnesota however continues to personal actual property or a enterprise within the state.
For non-residents, you’d first decide your property tax legal responsibility when you have been a resident. You then pro-rate that property tax legal responsibility by the proportion of your gross property in Minnesota to your complete worth. For instance, take Mary Tyler and Robert from above. Assume they moved to Wisconsin earlier than they handed however stored a $500,000 cabin in Minnesota. As soon as they each move, their property would calculate what their property tax legal responsibility can be in the event that they have been residents – on this case, $260,000. Then, they might calculate the proportion of their property in Minnesota – $500,000 for the cabin out of $5,000,000 complete property or 10% of their complete property. Lastly, they’d multiply $260,000 occasions that 10%, and the ensuing $26,000 can be their last Minnesota property tax legal responsibility.
- Charitable Giving
Charitable donations can considerably cut back property taxes, as bequests to charity are totally deductible from the property. There aren’t any limits to charitable giving past what you may successfully deduct in your earnings tax return and what your monetary plan can help. Any charitable bequests produce a dollar-for-dollar offset to your property earlier than your tax legal responsibility is calculated at demise.
- Life Insurance coverage
Correctly structured life insurance coverage can present liquidity to cowl property taxes with out diminishing the property’s worth. There are particular guidelines round possession in order that the life insurance coverage proceeds aren’t included in your property. Nonetheless, if carried out correctly, a life insurance coverage coverage could make your beneficiaries complete in case your property has a tax legal responsibility.
Minnesota Outlook
Minnesota residents ought to usually overview their property plans to account for state-specific tax implications. Correct planning can make sure that extra of your property advantages your heirs quite than going to the Minnesota Division of Income.
At Mission Wealth, we’ll proceed to watch these proposed modifications and their potential impacts on our purchasers. In case you have any questions, please contact our wealth advisory and technique staff right now.
This text isn’t supposed to offer any particular tax or property planning recommendation. Advisory providers are solely provided to purchasers or potential purchasers the place Mission Wealth and its representatives are correctly licensed or exempt from licensure. Seek the advice of a tax skilled or lawyer for particular recommendation.