1.1 	A bill for an act
1.2 	relating to taxation; providing inflationary and
1.3 	family size adjustments to the dependent care credit
1.4 	and the working family credit; amending Minnesota
1.5 	Statutes 2004, sections 290.067, subdivisions 1, 2,
1.6 	2b; 290.0671, subdivision 1.
1.7 	BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

1.8 	Section 1. Minnesota Statutes 2004, section 290.067,
1.9 	subdivision 1, is amended to read:
1.10 		Subdivision 1.amount of credit eligibility.  (a) A
1.11 	taxpayer may take as a credit against the tax due from the
1.12 	taxpayer and a spouse, if any, under this chapter an amount
1.13 	equal to a percentage of the taxpayer's expenditures for
1.14 	employment-related expenses.  To receive a credit, a taxpayer
1.15 	must be eligible for the dependent care credit for which the
1.16 	taxpayer is eligible pursuant to the provisions of under section
1.17 	21 of the Internal Revenue Code subject to the limitations
1.18 	provided in subdivision 2 ,except that in determining whether
1.19 	the child qualified as a dependent, income received as a
1.20 	Minnesota family investment program grant or allowance to or on
1.21 	behalf of the child must not be taken into account in
1.22 	determining whether the child received more than half of the
1.23 	child's support from the taxpayer, and the provisions of section
1.24 	32(b)(1)(D) of the Internal Revenue Code do not apply.
1.25 	(b) If a child who has not attained the age of six years at
1.26 	the close of the taxable year is cared for at a licensed family
2.1 	day care home operated by the child's parent, the taxpayer is
2.2 	deemed to have paid employment-related expenses.  If the child
2.3 	is 16 months old or younger at the close of the taxable year,
2.4 	the amount of expenses deemed to have been paid equals the
2.5 	maximum limit for one qualified individual under section 21(c)
2.6 	and (d) of the Internal Revenue Code subdivision 2.  If the
2.7 	child is older than 16 months of age but has not attained the
2.8 	age of six years at the close of the taxable year, the amount of
2.9 	expenses deemed to have been paid equals the amount the licensee
2.10 	would charge for the care of a child of the same age for the
2.11 	same number of hours of care.
2.12 	(c) If a married couple:
2.13 	(1) has a child who has not attained the age of one year at
2.14 	the close of the taxable year;
2.15 	(2) files a joint tax return for the taxable year; and
2.16 	(3) does not participate in a dependent care assistance
2.17 	program as defined in section 129 of the Internal Revenue Code,
2.18 	in lieu of the actual employment related expenses paid for that
2.19 	child under paragraph (a) or the deemed amount under paragraph
2.20 	(b), the lesser of (i) the combined earned income of the couple
2.21 	or (ii) the amount of the maximum limit for one qualified
2.22 	individual under section 21(c) and (d) of the Internal Revenue
2.23 	Code will be deemed to be the employment related expense paid
2.24 	for that child.  The earned income limitation of section 21(d)
2.25 	of the Internal Revenue Code shall not apply to this deemed
2.26 	amount.  These deemed amounts apply regardless of whether any
2.27 	employment-related expenses have been paid.
2.28 	(d) If the taxpayer is not required and does not file a
2.29 	federal individual income tax return for the tax year, no credit
2.30 	is allowed for any amount paid to any person unless:
2.31 	(1) the name, address, and taxpayer identification number
2.32 	of the person are included on the return claiming the credit; or
2.33 	(2) if the person is an organization described in section
2.34 	501(c)(3) of the Internal Revenue Code and exempt from tax under
2.35 	section 501(a) of the Internal Revenue Code, the name and
2.36 	address of the person are included on the return claiming the
3.1 	credit.
3.2 	In the case of a failure to provide the information required
3.3 	under the preceding sentence, the preceding sentence does not
3.4 	apply if it is shown that the taxpayer exercised due diligence
3.5 	in attempting to provide the information required.
3.6 	In the case of a nonresident, part-year resident, or a
3.7 	person who has earned income not subject to tax under this
3.8 	chapter including earned income excluded pursuant to section
3.9 	290.01, subdivision 19b, clause (11), the credit determined
3.10 	under this section 21 of the Internal Revenue Code must be
3.11 	allocated based on the ratio by which the earned income of the
3.12 	claimant and the claimant's spouse from Minnesota sources bears
3.13 	to the total earned income of the claimant and the claimant's
3.14 	spouse.
3.15 	
EFFECTIVE DATE. This section is effective for taxable
3.16 	years beginning after December 31, 2004.

3.17 	Sec. 2. Minnesota Statutes 2004, section 290.067,
3.18 	subdivision 2, is amended to read:
3.19 		Subd. 2.Limitations. (a) The credit for expenses
3.20 	incurred for the care of each dependent is computed as follows:
3.21 	(1) the amount of qualified employment-related expenses
3.22 	must be determined under section 21(b), (d), and (e) of the
3.23 	Internal Revenue Code, but may not exceed $3,000 for each
3.24 	qualifying individual; and 
3.25 	(2) the amount determined under clause (1) is multiplied by
3.26 	the applicable percentage determined under section 21(a)(2) of
3.27 	the Internal Revenue Code.
3.28 	(b) The credit for each qualifying individual shall not
3.29 	exceed $720 in any taxable year, and the total credit for all
3.30 	dependents of a claimant shall not exceed $1,440 in a taxable
3.31 	year.  The maximum total credit shall be reduced according to
3.32 	the amount of the income of the claimant and a spouse, if any,
3.33 	as follows:
3.34 	(1) income up to $18,040 $20,420, $720 maximum for one 
3.35 	each dependent, $1,440 for all dependents; and 
3.36 	(2) income over $18,040 $20,420, the maximum credit for one 
4.1 	each dependent shall be reduced by $18 for every $350 of
4.2 	additional income, $36 for all dependents.
4.3 	(c) For purposes of this section "qualifying individual"
4.4 	has the meaning given in section 21(b) of the Internal Revenue
4.5 	Code.
4.6 	(d) The commissioner shall construct and make available to
4.7 	taxpayers tables showing the amount of the credit at various
4.8 	levels of income and expenses.  The tables shall follow the
4.9 	schedule contained in this subdivision, except that the
4.10 	commissioner may graduate the transitions between expenses and
4.11 	income brackets.
4.12 	
EFFECTIVE DATE. This section is effective for taxable
4.13 	years beginning after December 31, 2004.

4.14 	Sec. 3. Minnesota Statutes 2004, section 290.067,
4.15 	subdivision 2b, is amended to read:
4.16 		Subd. 2b.Inflation adjustment.  The dollar amount of the
4.17 	income threshold at which the maximum credit begins to be
4.18 	reduced under subdivision 2 must be adjusted for inflation. For
4.19 	taxable years beginning after December 31, 2004, the maximum
4.20 	expenses and the maximum credit under subdivision 2 must also be
4.21 	adjusted for inflation.The commissioner shall make the
4.22 	inflation adjustments in accordance with section 1(f) of the
4.23 	Internal Revenue Code except that for the purposes of this
4.24 	subdivision the percentage increase must be determined from the
4.25 	year starting September 1, 1999 2003, and ending August 31, 2000 
4.26 	2004, as the base year for adjusting for inflation for the tax
4.27 	year beginning after December 31, 2000 2004.  The determination
4.28 	of the commissioner under this subdivision is not a rule under
4.29 	the Administrative Procedure Act.
4.30 	
EFFECTIVE DATE. This section is effective for taxable
4.31 	years beginning after December 31, 2004.

4.32 	Sec. 4. Minnesota Statutes 2004, section 290.0671,
4.33 	subdivision 1, is amended to read:
4.34 		Subdivision 1.Credit allowed.  (a) An individual is
4.35 	allowed a credit against the tax imposed by this chapter equal
4.36 	to a percentage of earned income.  To receive a credit, a
5.1 	taxpayer must be eligible for a credit under section 32 of the
5.2 	Internal Revenue Code.
5.3 	(b) For individuals with no qualifying children, the credit
5.4 	equals 1.9125 percent of the first $4,620 of earned income.  The
5.5 	credit is reduced by 1.9125 percent of earned income or modified
5.6 	adjusted gross income, whichever is greater, in excess of
5.7 	$5,770, but in no case is the credit less than zero.
5.8 	(c) For individuals with one qualifying child, the credit
5.9 	equals 8.5 percent of the first $6,920 of earned income and 8.5
5.10 	percent of earned income over $12,080 but less than $13,450.
5.11 	The credit is reduced by 5.73 percent of earned income or
5.12 	modified adjusted gross income, whichever is greater, in excess
5.13 	of $15,080, but in no case is the credit less than zero.
5.14 	(d) For individuals with two or more qualifying children,
5.15 	the credit equals ten percent of the first $9,720 of earned
5.16 	income and 20 percent of earned income over $14,860 but less
5.17 	than $16,800.  The credit is reduced by 10.3 percent of earned
5.18 	income or modified adjusted gross income, whichever is greater,
5.19 	in excess of $17,890, but in no case is the credit less than
5.20 	zero.
5.21 	(e) For individuals with more than two qualifying children,
5.22 	the amount of credit for which the individual would otherwise
5.23 	qualify under paragraph (d) is increased by an amount equal to
5.24 	the difference between the credit for which an individual with
5.25 	the same income would be eligible under paragraph (c) and the
5.26 	credit for which an individual with the same income would be
5.27 	eligible under paragraph (d), multiplied by the number of the
5.28 	individual's qualifying children in excess of two.
5.29 	(f) For a nonresident or part-year resident, the credit
5.30 	must be allocated based on the percentage calculated under
5.31 	section 290.06, subdivision 2c, paragraph (e).
5.32 	(f) (g) For a person who was a resident for the entire tax
5.33 	year and has earned income not subject to tax under this
5.34 	chapter, including income excluded under section 290.01,
5.35 	subdivision 19b, clause (11), the credit must be allocated based
5.36 	on the ratio of federal adjusted gross income reduced by the
6.1 	earned income not subject to tax under this chapter over federal
6.2 	adjusted gross income.
6.3 	(g) (h) For tax years beginning after December 31, 2001,
6.4 	and before December 31, 2004, the $5,770 in paragraph (b), the
6.5 	$15,080 in paragraph (c), and the $17,890 in paragraph (d),
6.6 	after being adjusted for inflation under subdivision 7, are each
6.7 	increased by $1,000 for married taxpayers filing joint returns.
6.8 	(h) (i) For tax years beginning after December 31, 2004,
6.9 	and before December 31, 2007, the $5,770 in paragraph (b), the
6.10 	$15,080 in paragraph (c), and the $17,890 in paragraph (d),
6.11 	after being adjusted for inflation under subdivision 7, are each
6.12 	increased by $2,000 for married taxpayers filing joint returns.
6.13 	(i) (j) For tax years beginning after December 31, 2007,
6.14 	and before December 31, 2010, the $5,770 in paragraph (b), the
6.15 	$15,080 in paragraph (c), and the $17,890 in paragraph (d),
6.16 	after being adjusted for inflation under subdivision 7, are each
6.17 	increased by $3,000 for married taxpayers filing joint returns.
6.18 	For tax years beginning after December 31, 2008, the $3,000 is
6.19 	adjusted annually for inflation under subdivision 7.
6.20 	(j) (k) The commissioner shall construct tables showing the
6.21 	amount of the credit at various income levels and make them
6.22 	available to taxpayers.  The tables shall follow the schedule
6.23 	contained in this subdivision, except that the commissioner may
6.24 	graduate the transition between income brackets.
6.25 	
EFFECTIVE DATE. This section is effective for taxable
6.26 	years beginning after December 31, 2004.