Minnesota Adds Gift Tax

In the recent race to the finish of the Minnesota Legislative session, a flurry of tax changes were introduced, with some getting less attention than others.  One that passed under the radar of many is a new gift tax that will be imposed by Minnesota in a few short weeks.  Here are the details.

  • The gift tax goes into effect for gifts made after June 30, 2013
  • Each Minnesotan is allowed to gift up to $1 million during their lifetime, tax free.
  • After the first $1 million in gifts, a 10% tax rate is charged on any future gifts.

Further, any gifts made within 3 years of a taxpayer’s death will be “clawed back” and will be considered part of the decedent’s estate when calculating Minnesota estate tax.  Minnesota exempts only the first $1 million of a decedent’s estate from tax, so pulling prior gifts back into the estate can create additional estate tax burden.

Due to all of this, careful planning is needed when considering making gifts of larger size, or of appreciated real estate, to be sure that all tax ramifications have been taken into account.  As always, we’re here to help.

IRS Changes Penalty Relief Policies

The IRS has usually forgiven penalties charged on a tax return if it is the first time the taxpayer has ever had the penalty imposed.  This “first time abatement” policy has worked well for taxpayers who make a one-time error that results in a penalty.

However,  changes to this policy have just been announced.  The IRS can now refuse to abate first-time penalties if all prior tax returns have not been filed, and all prior taxes have not been paid or put onto a payment plan.

The abatement also only relates to one period, so if a number of late returns are filed and penalized all at once, only one year of penalties can be abated.

Lastly, first-time penalty relief does not apply to Estate Tax (706), Gift Tax (709), or Corporation Income Tax (1120) returns.  It also does not apply if an S-Corporation return (1120S) was late filed in the past but not penalized.

These rules make it more difficult to get penalties abated, but it is always worth asking the IRS to do so.  Working with someone who knows how the process works can improve your odds of getting a favorable result.