Tax law changes include increase in homestead credit refunds, fraud tax

The 2026 version of the collection of tax provisions offers $40.3 million in tax aids and credits and $16.2 million in increased revenue. That results in a net General Fund reduction of $24.1 million.

The law includes an increase in homestead credit refunds, a transfer of General Fund money to help reduce vehicle registration fees, the creation of a new “fraud tax” and a direct free file system, and several items designed to pull the state’s tax code into conformity with changes made at the federal level over the past three years.

Rep. Greg Davids (R-Preston) and Sen. Ann Rest (DFL-New Hope) sponsor the law.

Here are some highlights of the law.

Article 1: Federal Conformity

The law adopts most of the federal income tax changes included in Public Law 119-21, also known as the One Big Beautiful Bill Act (OBBBA). All are effective beginning in tax year 2026, except where indicated.

It adopts all that act’s changes, except that it:

• limits the charitable contribution deductions to individuals to contributions in excess of 1% of the contribution base (the limit under OBBBA is 0.5%);

• limits distributions from section 529 plans to be used for postsecondary credentialing expenses, effective at the same time the changes in federal law are effective for federal purposes;

• doesn’t adopt the federal exclusion for employer student loan payments and freezes the state exclusion from gross income for other educational assistance payments at $5,250;

• retains the pre-OBBBA inflation indexing on the exclusion from gross income for transportation fringe benefits;

• doesn’t adopt OBBBA’s provision giving hazard duty pay for individuals performing services in the Sinai Peninsula, Kenya, Mali, Burkina Faso, and Chad;

• doesn’t adopt a federal provision allowing financial institutions a 25% exclusion from gross income on interest earned from loans secured by rural and agricultural property;

• doesn’t adopt provisions allowing business meal deductions for meals provided on fishing vessels, fish processing facilities, oil and gas platforms, and food and beverages that are sold in a bona fide transaction;

• decouples from federal C corporation rules allowing immediate expensing of research and experimental expenditures, effective beginning in tax year 2022;

• decouples the state dependent care credit from the federal dependent care credit and doesn’t adopt the expansion of that credit in OBBBA; and

• doesn’t adopt the “look-through” rule for determining subpart F income and net Controlled Foreign Corporation tested income.

Article 2: Individual Income and Corporate Franchise Taxes

Sustainable aviation fuel (SAF) tax credits: The law allows a supplemental tax credit of 2 cents per gallon, up to $2 per gallon total, for SAF projects meeting certain carbon intensity reductions, effective retroactively beginning in tax year 2025. It also increases and expands the amount of money allocated to the Sustainable Aviation Fuel credit from $11.6 million from Fiscal Years 2025 through 2027 to $36.9 million from Fiscal Years 2025 through 2035, effective retroactively beginning in tax year 2026. And it expands the expiration of the credit through 2035, effective May 28, 2026.

Beginning farmer income tax credits: The law uncaps the $4 million beginning farmer credit allocation for tax year 2026 only.

Pass-through entity taxes: The law extends the expiration of the tax for tax years 2026 and 2027 and conforms the change for taxes paid to other states. It also changes the pass-through entity tax definition of net income to conform to a previous change allowing the assignment of resident pass-through owner income to Minnesota for purposes of determining the pass-through entity tax base, effective May 28, 2026. It allows the Department of Revenue to disallow the individual income tax credit for the pass-through entity tax if the tax liability of the pass-through entity has not been paid, effective May 28, 2026. And it provides that no addition is imposed to the tax penalty for pass-through entity tax estimated payments, effective for tax year 2026 only.

Direct free file program: The law requires the Revenue Department to establish an electronic system available on its website through which taxpayers can directly file their tax returns for free, with no limits to access based on income. The system must allow taxpayers to file and claim six individual income tax credits. The department is also permitted to establish a system through which taxpayers may file a federal return for free. Software vendors currently providing paid tax preparation services to Minnesota taxpayers are not eligible to participate in the system. The Revenue Department is required to use funds in the tax filing modernization account (now slated to expire in 2029) to pay for the system established in the bill. The law also appropriates $2.3 million in Fiscal Year 2027 for the direct free filing system, and sets the base for that appropriation at $3.5 million in Fiscal Years 2028 and 2029. All changes are effective May 28, 2026.

Nursing facility workforce wage supplement program: The law establishes an individual income tax subtraction for one-time payments to nursing facility workers, effective for tax year 2026 only.

Article 3: Sales and Use Tax

This article creates an exemption for the sale of the privilege of admission to certain events sponsored by the PGA (effective for sales and purchases made after June 30, 2026), and allows businesses within a tourism improvement district to collect a service charge from purchasers, exclusive of sales tax (effective retroactively for sales and purchases made after June 30, 2025).

Article 4: Property Tax Aids and Credits

Among the various changes related to property taxes and state aids to local governments, provisions in this article allow the new city of Northern to be eligible for local government aid in 2027. Here are some of the other provisions.

Seasonal tax base replacement aid: The law establishes a new school district aid that reduces a portion of voter-approved operating referendum levies in school districts with class 4c(12) seasonal recreational property. This section is effective for taxes payable in 2027 and later.

Property tax exemptions for property owned by the Fond du Lac Band of Lake Superior Chippewa: The law modifies an exemption for a property in Duluth and establishes an exemption for a property in Cloquet. Both are effective beginning with assessments and taxes payable in tax year 2027.

Homestead resort property: Tier thresholds for class 1c homestead resort properties are increased from $600,000 to $1.5 million for the first tier and from $2.3 million to $4.5 million for the second tier, effective beginning with assessment year 2026.

Local homeless prevention aid: Its expiration is extended from 2028 to 2032.

Lake City: The city is authorized to establish a port authority by Jan. 1, 2027, but the port authority’s powers are modified by removing its authority to issue debt or bonds or to exercise the power of eminent domain. This is effective May 28, 2026.

Homestead credit refunds: The homestead credit refund for refunds based on taxes payable in 2026 is increased by 14.88 percent, effective only for property taxes payable in 2026.

Article 5: Mineral Taxes

This article establishes an alternative distribution of the proceeds of the taconite production tax from Mesabi Metallics. Proceeds from the company’s production tax will be used to increase payments to various school districts and municipalities. These increases will be covered by reductions in distributions to other funds. All the changes are effective once Mesabi Metallics starts production.

Article 6: Tax Increment Financing

This article clarifies the conditions under which authorities must either return increment in excess of tax increment financing costs approved in a tax increment financing plan or modify their tax increment financing plans. It also modifies or extends special tax increment financing authority for the cities of Chaska, Columbia Heights, Eden Prairie, Hopkins, Mountain Lake and Wayzata.

Article 7: Public Finance

This article shortens the notice period prior to issuing county transportation bonds from 14 days to 10 days, and removes a requirement that port authority bonds mature serially.

Article 8: Miscellaneous

Among other provisions, this article extends the sunset on the mortgage and deed taxes in Hennepin and Ramsey counties to the end of 2036. Here are some other provisions.

Fraud tax: The law imposes a new tax equal to 100% of amounts obtained through public program fraud, effective for convictions of fraud in 2026. It also allows for information sharing between the Bureau of Criminal Apprehension’s financial crimes and fraud section and the Revenue Department (effective May 28, 2026), as well as between the Office of Inspector General and the Revenue Department, effective Jan. 1, 2027. It imposes personal liability for not paying the fraud tax, and requires a defrauded state agency to certify conviction information to the Department of Revenue, both effective for convictions of fraud beginning in 2026. Revenue collected from the tax is required to be deposited in a newly created tax relief account for use in reducing the first-tier rate for a taxable year, effective for convictions of fraud in 2026. After two consecutive rate reductions, money in the tax relief account must be deposited in the General Fund.

Claims for a refund: Taxpayers can file a claim for a refund if they’ve overpaid tax for a given year, but it is now limited to three-and-a-half years from the date the return was due, including any extension granted, and allows a claim for a refund within two years from the date that tax penalties or interest was paid, effective May 28, 2026.

Funding for a study on nuclear energy: The law appropriates $500,000 to the Department of Commerce for a contract with the Great Plains Institute for a study on nuclear energy, and requires a legislative report on the study to be submitted by Feb. 1, 2027.

Minnesota Forward Fund: This Department of Employment and Economic Development fund is designed to facilitate private investment in business attraction, retention and expansion in Minnesota. The law cancels $15 million for a Fiscal Year 2024 appropriation and transfers $15 million from the fund to the General Fund in Fiscal Year 2027.

Transfers: Under the law, $75 million is transferred from the driver and vehicle services operating account to the General Fund in Fiscal Year 2027. It also returns up to $40 million to the General Fund of an unused tax-forfeited settlement appropriation in the possession of a claims administrator.

Family homeless assistance and prevention program: In Fiscal Year 2026, a $38 million appropriation from the General Fund is provided to the Minnesota Housing Finance Agency for this program.

Articles 9-11

In these articles, nonresident partners in a partnership with Minnesota income tax liability are allowed to file composite returns under some conditions, and there’s some clarifying language on the definition of net income related to accelerated gains. But the provisions in these articles are primarily technical corrections requested by the Department of Revenue. For example, they remove and repeal obsolete property tax programs and remove references to the expired JOBZ (Job Opportunity Building Zones) program in state law.

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