This fall, Minnesota sent a one-time tax rebate of up to $1,300 to more than 2 million taxpayers as part of the $3 billion One Minnesota budget. Initially, it was believed that there would be no tax on Minnesota rebate checks. However, it recently came to light that Minnesota rebate checks, commonly known as “Walz checks,” will be federally taxable.
How much tax will you need to pay?
In May, Gov. Tim Walz signed into law the One Minnesota budget, which included a one-time tax rebate of up to $1,300. Eligible individual residents received a rebate check of $260 if they had a gross adjusted income of up to $75,000 in 2021, while married filers with income up to $150,000 received $520.
Additionally, families were allowed to claim a rebate check for up to three dependents. So, the maximum a family could get was $1,300.
Depending on the rebate check amount and the individual’s federal tax bracket, a recipient will have to pay federal tax on Minnesota rebate checks between $26 and $286. It must be noted that the rebate checks aren’t taxable in Minnesota; rather, on the federal level.
Now, the Minnesota Department of Revenue plans to send a 1099-MISC form to recipients to help them with the federal tax process. The 1099-MISC is used to report miscellaneous income to the IRS.
According to the Minnesota DOR, a rebate recipient needs to subtract the rebate from their Minnesota taxable income (line 33 of Schedule M1M) on their state return and report the rebate amount as income when filing federal returns for 2023.
Tax on Minnesota rebate checks: is it valid?
The decision from the IRS to levy tax on the Minnesota rebate checks is different than how the agency treated similar rebates distributed by 21 states in 2022. However, the IRS issued guidance this summer suggesting that it would have a different approach on the recently enacted rebates, i.e., rebates approved after 2022.
The Minnesota Department of Revenue wasn’t able to convince the IRS to give the same tax treatment to the rebate checks as was given to the stimulus checks at the time of COVID-19. The COVID-19 stimulus checks were completely tax-free.
The IRS noted that the federal pandemic emergency declaration ended on May 11, 2023. Minnesota lawmakers gave final approval to the rebate on May 21, and the governor signed it into law on May 23.
Gov. Walz expressed his disappointment over the IRS’ decision to tax Minnesota rebate checks, saying he is “deeply disappointed” and that “Minnesota is being treated unfairly in this.” Walz is concerned that the tax would add an unexpected financial burden on the rebate recipients.
The federal tax, however, won’t impact all rebate recipients. Revenue Commissioner Paul Marquart estimates that 18% of the rebate recipients, or about 390,000 recipients, won’t owe any federal tax because they don’t have a federal tax liability. The remaining recipients will be impacted by the tax on Minnesota rebate checks.
