I live in Illinois with no RMD tax but Minnesota is taxing my RMD

[willdp]

I live in Illinois with no RMD tax yet Minnesota is taxing me on my RMD because I have income from a Minnesota LLC.  Is there anyway to avoid this Minnesota tax?

[SabrinaD2]

Minnesota taxes your Required Minimum Distribution (RMD) because you have income from a Minnesota LLC. Here are some strategies to potentially reduce or avoid this tax:

• Qualified Charitable Distributions (QCDs): Transfer your RMD directly to a qualified charity. This can satisfy your RMD requirement without being included in your taxable income. Learn more
• Qualified Longevity Annuity Contract (QLAC): Transfer up to $200,000 of your retirement plan assets to a QLAC. This reduces the amount subject to RMDs and delays taxes until you start receiving annuity payments. Learn more
• Roth IRA Conversion: Convert your traditional IRA to a Roth IRA. Roth IRAs are not subject to RMDs, but note that the conversion itself is a taxable event. Learn more

[willdp]

Since Minnesota requires you to use the form M1NR as a non-resident, they include your 1040 AGI (which includes my RMD which is exempt in Illinois) when they compute my MN taxes.  They then divide my Minnesota income from a LLC by the 1040 AGI and multiply that ratio with the 1040AGI from the MN tax table.  So essentially you pay tax on RMDs even though you live in Illinois.

Is there a place on the M1NR to exclude my RMD's since Illinois doesn't tax retirement distributions.

[TomD8]

See Line 5 of Minnesota Form M1NR:

https://www.revenue.state.mn.us/sites/default/files/2024-12/m1nr-24_0.pdf

[willdp]

Are you suggesting that I zero out line 5, if I do it won't agree with my Fed 1040

[willdp]

I already have column B line 5 as zero.  When MN computes the tax using the Fed AGI, I'm looking for a way to take the RMD out of the tax calculation

[TomD8 · Accepted solution]

Other states do this as well.  (New York is the prime example)

First, they calculate your MN tax as if all your taxable income were being taxed by MN.  Then they multiply that number by the % of your income that is in fact taxable by Minnesota, in order to determine your actual Minnesota tax due.

MN would tell you that your RMD is not being taxed.

Might seem unfair, but that's how they do it.

[willdp]

Yes, you're correct, it certainly isn't fair to live in a state where retirement benefits are tax free only to pay for it another state because you have some income from their state.  I checked, it's significant, in my case it's an additional 5k that MN received whereas IL received 0.