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             the education credit and subtraction, and the working 
  1.5             family credit; appropriating money; amending Minnesota 
  1.6             Statutes 1998, sections 290.01, subdivision 19b; 
  1.7             290.067, subdivisions 1, 2, and 2b; 290.0671, 
  1.8             subdivision 1; and 290.0674, subdivision 2; proposing 
  1.9             coding for new law in Minnesota Statutes, chapter 290. 
  1.10  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.11     Section 1.  Minnesota Statutes 1998, section 290.01, 
  1.12  subdivision 19b, is amended to read: 
  1.13     Subd. 19b.  [SUBTRACTIONS FROM FEDERAL TAXABLE INCOME.] For 
  1.14  individuals, estates, and trusts, there shall be subtracted from 
  1.15  federal taxable income: 
  1.16     (1) interest income on obligations of any authority, 
  1.17  commission, or instrumentality of the United States to the 
  1.18  extent includable in taxable income for federal income tax 
  1.19  purposes but exempt from state income tax under the laws of the 
  1.20  United States; 
  1.21     (2) if included in federal taxable income, the amount of 
  1.22  any overpayment of income tax to Minnesota or to any other 
  1.23  state, for any previous taxable year, whether the amount is 
  1.24  received as a refund or as a credit to another taxable year's 
  1.25  income tax liability; 
  1.26     (3) the amount paid to others, less the credit allowed 
  1.27  under section 290.0674, not to exceed $1,625 for each dependent 
  2.1   in grades kindergarten to 6 and $2,500 for each dependent in 
  2.2   grades 7 to 12, for tuition, textbooks, and transportation of 
  2.3   each dependent in attending an elementary or secondary school 
  2.4   situated in Minnesota, North Dakota, South Dakota, Iowa, or 
  2.5   Wisconsin, wherein a resident of this state may legally fulfill 
  2.6   the state's compulsory attendance laws, which is not operated 
  2.7   for profit, and which adheres to the provisions of the Civil 
  2.8   Rights Act of 1964 and chapter 363.  For taxable years beginning 
  2.9   after December 31, 1998, the maximum amounts in this clause must 
  2.10  be adjusted by the percentage determined under section 290.06, 
  2.11  subdivision 2d, for the taxable year.  For the purposes of this 
  2.12  clause, "tuition" includes fees or tuition as defined in section 
  2.13  290.0674, subdivision 1, clause (1).  As used in this clause, 
  2.14  "textbooks" includes books and other instructional materials and 
  2.15  equipment used in elementary and secondary schools in teaching 
  2.16  only those subjects legally and commonly taught in public 
  2.17  elementary and secondary schools in this state.  Equipment 
  2.18  expenses qualifying for deduction includes expenses as defined 
  2.19  and limited in section 290.0674, subdivision 1, clause (3).  
  2.20  "Textbooks" does not include instructional books and materials 
  2.21  used in the teaching of religious tenets, doctrines, or worship, 
  2.22  the purpose of which is to instill such tenets, doctrines, or 
  2.23  worship, nor does it include books or materials for, or 
  2.24  transportation to, extracurricular activities including sporting 
  2.25  events, musical or dramatic events, speech activities, driver's 
  2.26  education, or similar programs; 
  2.27     (4) to the extent included in federal taxable income, 
  2.28  distributions from a qualified governmental pension plan, an 
  2.29  individual retirement account, simplified employee pension, or 
  2.30  qualified plan covering a self-employed person that represent a 
  2.31  return of contributions that were included in Minnesota gross 
  2.32  income in the taxable year for which the contributions were made 
  2.33  but were deducted or were not included in the computation of 
  2.34  federal adjusted gross income.  The distribution shall be 
  2.35  allocated first to return of contributions until the 
  2.36  contributions included in Minnesota gross income have been 
  3.1   exhausted.  This subtraction applies only to contributions made 
  3.2   in a taxable year prior to 1985; 
  3.3      (5) income as provided under section 290.0802; 
  3.4      (6) the amount of unrecovered accelerated cost recovery 
  3.5   system deductions allowed under subdivision 19g; 
  3.6      (7) to the extent included in federal adjusted gross 
  3.7   income, income realized on disposition of property exempt from 
  3.8   tax under section 290.491; 
  3.9      (8) to the extent not deducted in determining federal 
  3.10  taxable income, the amount paid for health insurance of 
  3.11  self-employed individuals as determined under section 162(l) of 
  3.12  the Internal Revenue Code, except that the 25 percent limit does 
  3.13  not apply.  If the taxpayer deducted insurance payments under 
  3.14  section 213 of the Internal Revenue Code of 1986, the 
  3.15  subtraction under this clause must be reduced by the lesser of: 
  3.16     (i) the total itemized deductions allowed under section 
  3.17  63(d) of the Internal Revenue Code, less state, local, and 
  3.18  foreign income taxes deductible under section 164 of the 
  3.19  Internal Revenue Code and the standard deduction under section 
  3.20  63(c) of the Internal Revenue Code; or 
  3.21     (ii) the lesser of (A) the amount of insurance qualifying 
  3.22  as "medical care" under section 213(d) of the Internal Revenue 
  3.23  Code to the extent not deducted under section 162(1) of the 
  3.24  Internal Revenue Code or excluded from income or (B) the total 
  3.25  amount deductible for medical care under section 213(a); 
  3.26     (9) the exemption amount allowed under Laws 1995, chapter 
  3.27  255, article 3, section 2, subdivision 3; 
  3.28     (10) to the extent included in federal taxable income, 
  3.29  postservice benefits for youth community service under section 
  3.30  124D.42 for volunteer service under United States Code, title 
  3.31  42, section 5011(d), as amended; 
  3.32     (11) to the extent not subtracted under clause (1), the 
  3.33  amount of income or gain included in federal taxable income 
  3.34  under section 1366 of the Internal Revenue Code flowing from a 
  3.35  corporation that has a valid election in effect for the taxable 
  3.36  year under section 1362 of the Internal Revenue Code which is 
  4.1   not allowed to be an "S" corporation under section 290.9725; 
  4.2      (12) in the year stock of a corporation that had made a 
  4.3   valid election under section 1362 of the Internal Revenue Code 
  4.4   but was not an "S" corporation under section 290.9725 is sold or 
  4.5   disposed of in a transaction taxable under the Internal Revenue 
  4.6   Code, the amount of difference between the Minnesota basis of 
  4.7   the stock under subdivision 19f, paragraph (m), and the federal 
  4.8   basis if the Minnesota basis is higher than the shareholder's 
  4.9   federal basis; and 
  4.10     (13) an amount equal to an individual's, trust's, or 
  4.11  estate's net federal income tax liability for the tax year that 
  4.12  is attributable to items of income, expense, gain, loss, or 
  4.13  credits federally flowing to the taxpayer in the tax year from a 
  4.14  corporation, having a valid election in effect for federal tax 
  4.15  purposes under section 1362 of the Internal Revenue Code but not 
  4.16  treated as an "S" corporation for state tax purposes under 
  4.17  section 290.9725. 
  4.18     Sec. 2.  Minnesota Statutes 1998, section 290.067, 
  4.19  subdivision 1, is amended to read: 
  4.20     Subdivision 1.  [~~AMOUNT OF CREDIT~~ ELIGIBILITY.] (a) A 
  4.21  taxpayer may take as a credit against the tax due from the 
  4.22  taxpayer and a spouse, if any, under this chapter an amount 
  4.23  equal to a percentage of the taxpayer's expenditures for 
  4.24  employment-related expenses.  To receive a credit, a taxpayer 
  4.25  must be eligible for the dependent care credit ~~for which the~~ 
  4.26  ~~taxpayer is eligible pursuant to the provisions of~~ under section 
  4.27  21 of the Internal Revenue Code ~~subject to the limitations~~ 
  4.28  ~~provided in subdivision 2~~, except that in determining whether 
  4.29  the child qualified as a dependent, income received as an aid to 
  4.30  families with dependent children grant or allowance to or on 
  4.31  behalf of the child, or as a grant or allowance to or on behalf 
  4.32  of the child under the successor program pursuant to Public Law 
  4.33  104-193, must not be taken into account in determining whether 
  4.34  the child received more than half of the child's support from 
  4.35  the taxpayer~~, and the provisions of section 32(b)(1)(D) of the~~ 
  4.36  ~~Internal Revenue Code do not apply~~. 
  5.1      (b) If a child who has not attained the age of six years at 
  5.2   the close of the taxable year is cared for at a licensed family 
  5.3   day care home operated by the child's parent, the taxpayer is 
  5.4   deemed to have paid employment-related expenses.  If the child 
  5.5   is 16 months old or younger at the close of the taxable year, 
  5.6   the amount of expenses deemed to have been paid equals the 
  5.7   maximum limit for one qualified individual under ~~section 21(c)~~ 
  5.8   ~~and (d) of the Internal Revenue Code~~ subdivision 2.  If the 
  5.9   child is older than 16 months of age but has not attained the 
  5.10  age of six years at the close of the taxable year, the amount of 
  5.11  expenses deemed to have been paid equals the amount the licensee 
  5.12  would charge for the care of a child of the same age for the 
  5.13  same number of hours of care.  
  5.14     (c) If a married couple: 
  5.15     (1) has a child who has not attained the age of one year at 
  5.16  the close of the taxable year; 
  5.17     (2) files a joint tax return for the taxable year; and 
  5.18     (3) does not participate in a dependent care assistance 
  5.19  program as defined in section 129 of the Internal Revenue Code~~,~~. 
  5.20     In lieu of the actual employment related expenses paid for 
  5.21  that child under paragraph (a) or the deemed amount under 
  5.22  paragraph (b), the lesser of (i) the combined earned income of 
  5.23  the couple or (ii) ~~$2,400~~ $4,800, will be deemed to be the 
  5.24  employment related expense paid for that child.  The earned 
  5.25  income limitation of section 21(d) of the Internal Revenue Code 
  5.26  shall not apply to this deemed amount.  These deemed amounts 
  5.27  apply regardless of whether any employment-related expenses have 
  5.28  been paid.  
  5.29     (d) If the taxpayer is not required and does not file a 
  5.30  federal individual income tax return for the tax year, no credit 
  5.31  is allowed for any amount paid to any person unless: 
  5.32     (1) the name, address, and taxpayer identification number 
  5.33  of the person are included on the return claiming the credit; or 
  5.34     (2) if the person is an organization described in section 
  5.35  501(c)(3) of the Internal Revenue Code and exempt from tax under 
  5.36  section 501(a) of the Internal Revenue Code, the name and 
  6.1   address of the person are included on the return claiming the 
  6.2   credit.  
  6.3   In the case of a failure to provide the information required 
  6.4   under the preceding sentence, the preceding sentence does not 
  6.5   apply if it is shown that the taxpayer exercised due diligence 
  6.6   in attempting to provide the information required. 
  6.7      In the case of a nonresident, part-year resident, or a 
  6.8   person who has earned income not subject to tax under this 
  6.9   chapter, the credit determined under this section ~~21 of the~~ 
  6.10  ~~Internal Revenue Code~~ must be allocated based on the ratio by 
  6.11  which the earned income of the claimant and the claimant's 
  6.12  spouse from Minnesota sources bears to the total earned income 
  6.13  of the claimant and the claimant's spouse. 
  6.14     Sec. 3.  Minnesota Statutes 1998, section 290.067, 
  6.15  subdivision 2, is amended to read: 
  6.16     Subd. 2.  [LIMITATIONS.] (a) The credit for expenses 
  6.17  incurred for the care of each dependent is computed as follows: 
  6.18     (1) the amount of qualified employment-related expenses 
  6.19  must be determined under section 21(b), (d), and (e) of the 
  6.20  Internal Revenue Code, but may not exceed $4,800 for each 
  6.21  qualifying individual; and 
  6.22     (2) the amount determined under clause (1) is multiplied by 
  6.23  the applicable percentage determined under section 21(a)(2) of 
  6.24  the Internal Revenue Code. 
  6.25     (b) The credit shall not exceed ~~$720~~ $1,440 in any taxable 
  6.26  year~~, and the total credit for all dependents of a claimant~~ 
  6.27  ~~shall not exceed $1,440 in a taxable year~~.  The maximum total 
  6.28  credit shall be reduced according to the amount of the income of 
  6.29  the claimant and a spouse, if any, as follows:  
  6.30     income up to $13,350, ~~$720~~ $1,440 maximum for ~~one~~ each 
  6.31  dependent~~, $1,440 for all dependents~~; 
  6.32     income over $13,350, the maximum credit for ~~one~~ each 
  6.33  dependent shall be reduced by $18 for every $350 of additional 
  6.34  income~~, $36 for all dependents~~. 
  6.35     The commissioner shall construct and make available to 
  6.36  taxpayers tables showing the amount of the credit at various 
  7.1   levels of income and expenses.  The tables shall follow the 
  7.2   schedule contained in this subdivision, except that the 
  7.3   commissioner may graduate the transitions between expenses and 
  7.4   income brackets.  
  7.5      Sec. 4.  Minnesota Statutes 1998, section 290.067, 
  7.6   subdivision 2b, is amended to read: 
  7.7      Subd. 2b.  [INFLATION ADJUSTMENT.] The dollar amount of the 
  7.8   income threshold at which the maximum credit begins to be 
  7.9   reduced under subdivision 2 must be adjusted for inflation.  
  7.10  Beginning taxable years after December 31, 1999, the maximum 
  7.11  expenses and the maximum credit under subdivision 2 must also be 
  7.12  adjusted for inflation.  The commissioner shall adjust 
  7.13  the ~~threshold amount~~ amounts by the percentage determined under 
  7.14  section 290.06, subdivision 2d, for the taxable year. 
  7.15     Sec. 5.  Minnesota Statutes 1998, section 290.0671, 
  7.16  subdivision 1, is amended to read: 
  7.17     Subdivision 1.  [CREDIT ALLOWED.] (a) An individual is 
  7.18  allowed a credit against the tax imposed by this chapter equal 
  7.19  to a percentage of earned income.  To receive a credit, a 
  7.20  taxpayer must be eligible for a credit under section 32 of the 
  7.21  Internal Revenue Code.  
  7.22     (b) For individuals with no qualifying children, the credit 
  7.23  equals 1.1475 percent of the first $4,460 of earned income.  The 
  7.24  credit is reduced by 1.1475 percent of earned income or modified 
  7.25  adjusted gross income, whichever is greater, in excess of 
  7.26  $5,570, but in no case is the credit less than zero. 
  7.27     (c) For individuals with one qualifying child, the credit 
  7.28  equals 6.8 percent of the first $6,680 of earned income and 8.5 
  7.29  percent of earned income over $11,650 but less than $12,990.  
  7.30  The credit is reduced by 4.77 percent of earned income or 
  7.31  modified adjusted gross income, whichever is greater, in excess 
  7.32  of $14,560, but in no case is the credit less than zero. 
  7.33     (d) For individuals with two ~~or more~~ qualifying children, 
  7.34  the credit equals eight percent of the first $9,390 of earned 
  7.35  income and 20 percent of earned income over $14,350 but less 
  7.36  than $16,230.  The credit is reduced by 8.8 percent of earned 
  8.1   income or modified adjusted gross income, whichever is greater, 
  8.2   in excess of $17,280, but in no case is the credit less than 
  8.3   zero. 
  8.4      (e) For individuals with more than two children, the amount 
  8.5   of credit for which the individual would otherwise qualify under 
  8.6   paragraph (d) is increased by an amount equal to the difference 
  8.7   between the credit for which an individual with the same income 
  8.8   would be eligible under paragraph (c) and the credit for which 
  8.9   an individual with the same income would be eligible under 
  8.10  paragraph (d), multiplied by the number of the individual's 
  8.11  dependents in excess of two. 
  8.12     (f) For a nonresident or part-year resident, the credit 
  8.13  must be allocated based on the percentage calculated under 
  8.14  section 290.06, subdivision 2c, paragraph (e). 
  8.15     ~~(f)~~ (g) For a person who was a resident for the entire tax 
  8.16  year and has earned income not subject to tax under this 
  8.17  chapter, the credit must be allocated based on the ratio of 
  8.18  federal adjusted gross income reduced by the earned income not 
  8.19  subject to tax under this chapter over federal adjusted gross 
  8.20  income. 
  8.21     Sec. 6.  Minnesota Statutes 1998, section 290.0674, 
  8.22  subdivision 2, is amended to read: 
  8.23     Subd. 2.  [LIMITATIONS.] (a) For claimants with income not 
  8.24  greater than $33,500, the maximum credit allowed is $1,000 per 
  8.25  child ~~and $2,000 per family~~.  No credit is allowed for 
  8.26  education-related expenses for claimants with income greater 
  8.27  than $33,500.  For purposes of this section "income" has the 
  8.28  meaning given in section 290.067, subdivision 2a.  In the case 
  8.29  of a married claimant, a credit is not allowed unless a joint 
  8.30  income tax return is filed. 
  8.31     (b) For a nonresident or part-year resident, the credit 
  8.32  determined under subdivision 1 and the maximum credit amount in 
  8.33  paragraph (a) must be allocated using the percentage calculated 
  8.34  in section 290.06, subdivision 2c, paragraph (e). 
  8.35     Sec. 7.  [290.0675] [CREDIT FOR CHILDREN.] 
  8.36     Subdivision 1.  [CREDIT ALLOWED.] A taxpayer and spouse may 
  9.1   take a credit against the tax imposed by this chapter equal to 
  9.2   $300 for each qualifying child as defined in section 24(c) of 
  9.3   the Internal Revenue Code.  The total credit a taxpayer is 
  9.4   allowed shall be reduced by $50 for each $1,000 of income, or 
  9.5   fraction thereof, over a threshold amount.  However, in no case 
  9.6   shall the credit be less than zero.  The threshold amounts are 
  9.7   $110,000 for married taxpayers filing joint returns, $55,000 for 
  9.8   married taxpayers filing separate returns, and $75,000 for all 
  9.9   other taxpayers.  For purposes of this section, "income" means 
  9.10  modified adjusted gross income as defined in section 24(b) of 
  9.11  the Internal Revenue Code. 
  9.12     For nonresidents and part-year residents, the credit must 
  9.13  be allocated based on the percentage calculated under section 
  9.14  290.067, subdivision 2c, paragraph (e). 
  9.15     Subd. 2.  [CREDIT REFUNDABLE.] If the amount of credit that 
  9.16  the claimant is eligible to receive under this section exceeds 
  9.17  the claimant's tax liability under this chapter, the 
  9.18  commissioner shall refund the excess to the claimant. 
  9.19     Subd. 3.  [INFLATION ADJUSTMENT.] For taxable years after 
  9.20  December 31, 1999, the credit amount and the income thresholds 
  9.21  at which the credit begins to be reduced in subdivision 1 must 
  9.22  be adjusted for inflation.  The commissioner shall adjust the 
  9.23  credit and threshold amounts by the percentage determined under 
  9.24  section 290.06, subdivision 2d, for the taxable year. 
  9.25     Subd. 4.  [APPROPRIATION.] An amount sufficient to pay the 
  9.26  refunds required by this section is annually appropriated to the 
  9.27  commissioner from the general fund. 
  9.28     Sec. 8.  [EFFECTIVE DATE.] 
  9.29     Sections 1 to 7 are effective for taxable years beginning 
  9.30  after December 31, 1998.