Minnesota’s new Net Investment Income Tax (NIIT) continues to draw attention from high income individuals, business owners, and wealth focused families across the state. As of tax years beginning after December 31, 2023, Minnesota now applies a 1% tax on certain types of investment income once it exceeds 1 million.
For many Minnesota investors especially those with fluctuating capital gains, real estate portfolios, or significant pass through income this new tax can affect long term financial decisions. With thoughtful planning however, taxpayers can manage or even reduce exposure.
Below is an updated, locally focused guide to help you understand the MN NIIT and the planning strategies that may benefit you in 2025–2026 and beyond.
What Is the Minnesota Net Investment Income Tax (MN NIIT)?
The MN NIIT is modeled after the federal NIIT but with Minnesota specific rules. The tax applies to individuals, trusts, and estates with more than 1 million of net investment income.
Examples of income included in MN NIIT:
Interest, dividends, and capital gains
Passive rental income
Income from passive partnership or S corporation interests
Royalties and certain investment based K 1 income
Important Minnesota specific rules:
Minnesota uses the federal definition as a starting point but adjusts for state level differences.
Nonresidents are still subject to MN NIIT on their Minnesota sourced investment income.
You cannot reduce MN NIIT with the credit for taxes paid to another state a key difference from normal Minnesota income tax rules.
Why This Matters for High Income Investors in Minnesota
A 1% surtax may sound modest, but high-income Minnesotans often experience large, infrequent spikes of investment income such as:
- Business sales
- Major stock redemptions
- Large capital gain distributions
- Real estate sales
- Significant passive K 1 allocations
Tax Smart Planning Strategies to Reduce MN NIIT Exposure
Manage the Timing of Capital Gains
Consider spreading gains over multiple tax years, using installment sales, harvesting losses, or timing transactions intentionally.
Strengthen Material Participation in Your Businesses
Increasing involvement in businesses may shift income out of MN NIIT. Document participation hours carefully.
Trust Planning for Minnesota Families
Trusts can distribute income to lower bracket beneficiaries or adjust structures to manage exposure.
Incorporate Charitable Planning
Donor advised funds, charitable remainder trusts, and charitable lead trusts can lower net investment income.
Review Residency and Income Sourcing Rules
Maintain documentation for domicile and ensure correct sourcing for multi state income.
Coordinating MN NIIT With Federal NIIT
Minnesota’s version differs from the federal rules. Coordinated planning can minimize combined effective NIIT rates.
Local Takeaway for Minnesota Investors
The MN NIIT is now part of Minnesota’s tax landscape. With proper planning, high income investors can manage exposure effectively.