Minnesota taxes for early retirees: high rates, a Social Security cliff, and a $3 million estate tax

By Tom, CPA · Updated October 29, 2026

TL;DR: Minnesota taxes IRA, 401(k), pension and capital gain income at 5.35% to 9.85%. Social Security is subtracted in full when 2026 AGI is $110,780 or less (joint), then the subtraction drops 10% per $4,000 step, rounded up. Public and military pensions have their own subtractions, homeowners may get a property tax refund, and the estate tax starts at $3 million.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Minnesota has 10,000 lakes, hotdish, and a state income tax that tops out at 9.85%, one of the highest in the country. It's also a state that mostly exempts Social Security, gives public and military retirees their own breaks, and sends some homeowners a property tax refund. Then it hides a few cliffs in the snowbanks.

This guide covers the 2026 Minnesota rules for early retirees: the brackets, what's taxed, the Social Security subtraction (and the $1 that can cost you $200), pension subtractions, property tax refunds, estate tax, and residency. Our guides are Lavish Larry, who winters in Arizona but "definitely still lives in Edina," and Frugal Fran, who considers a heated garage a luxury good.

CPA Warning Label: One dollar of AGI over the Social Security threshold ($110,780 joint for 2026) takes away 10% of your subtraction. For a couple with $40,800 of taxable benefits, $20 more of IRA income added $219 of Minnesota tax.

The 2026 brackets: four rates, and the top one stings

Minnesota taxes income at 5.35%, 6.80%, 7.85% and 9.85%. The 2026 brackets, published by the Minnesota Department of Revenue on December 1, 2025:

Married filing separately uses $24,350, $96,740 and $168,965. For comparison, the 2025 joint thresholds were $47,620, $189,180 and $330,410; they're indexed each year.

There's also a separate 1% Minnesota net investment income tax on net investment income above $1 million (tax years after 2023). Most early retirees won't see it unless they sell a business or a very large pile of index funds in one year.

What Minnesota taxes: almost everything except Social Security

Form M1 starts with your federal AGI. Minnesota then adds some items back and allows a list of subtractions on Schedule M1M. There's no general subtraction for IRA, 401(k), private pension or annuity income, so those are taxed at regular rates. So are Roth conversions. Capital gains get no special rate; a long-term gain is taxed just like wages.

The 2026 standard deduction is $30,600 joint, $23,000 head of household, and $15,300 single or married filing separately. People who are 65 or older or blind get an extra $1,600 each if married, or $2,000 if single or head of household. The standard deduction starts phasing down above $244,400 of AGI, and the dependent exemption is $5,300.

Illustration: Frugal Fran and her husband are both 55 and file jointly for 2026. Assumptions: a $50,000 Roth conversion and $40,000 of long-term capital gains, no other income, standard deduction. Minnesota taxable income is $90,000 minus $30,600, or $59,400. Tax is 5.35% of $48,700 ($2,605.45) plus 6.80% of the remaining $10,700 ($727.60), which comes to $3,333.05, using the rate schedule. A no-income-tax state would charge $0 on the same income, which is the kind of fact that makes Minnesotans suddenly interested in Florida.

The Social Security subtraction: exempt, until it isn't

Minnesota lets you subtract the Social Security benefits that are taxable on your federal return, but the subtraction phases out at higher incomes. You get the greater of two methods.

Simplified method. If your AGI is at or below the threshold, you subtract all of your federally taxable benefits. For 2026 the thresholds are $110,780 joint, $86,410 single or head of household, and $55,390 married filing separately. Above the threshold, the 2025 Schedule M1M worksheet takes the excess, divides it by $4,000 ($2,000 if married filing separately), rounds up to a whole number (maximum 10), and reduces the subtraction by 10% for each step. Rounding up means the first dollar over the line costs a full 10% of the subtraction. For a joint filer, the simplified subtraction is gone once AGI is more than $36,000 over the threshold.

Alternative method. A smaller backstop: up to $5,840 joint ($4,560 single or head of household, $2,920 separate), reduced by 20% of an income measure (roughly AGI minus taxable benefits plus half your benefits and tax-exempt interest) above $88,630 joint ($69,250 single or head of household, $44,315 separate). These amounts aren't indexed.

Illustration: Lavish Larry and his wife are both 67 and file jointly for 2026. Assumptions: $48,000 of combined Social Security and IRA withdrawals, standard deduction with two age-65 add-ons ($33,800). Federally, 85% of benefits ($40,800) are taxable either way (IRS Publication 915). With $69,980 of IRA withdrawals, AGI is exactly $110,780. They subtract all $40,800, Minnesota taxable income is $36,180, and tax is $1,935.63. With $70,000 of IRA withdrawals, AGI is $110,800, $20 over the line. That's one step, so the subtraction drops 10% to $36,720 (the alternative method gives only $4,766). Taxable income is $40,280 and tax is $2,154.98. Twenty extra dollars of IRA cost $219.35 of Minnesota tax, an 1,097% marginal rate. Larry would have been better off leaving the $20 in the IRA or spending it on cheese curds.

Each $4,000 step after that costs the same couple another $4,080 of subtraction, which is about $218 of tax at 5.35% or $277 at 6.80%, on top of the tax on the extra income itself. Combine it with the federal Social Security tax torpedo and the middle-income retiree zone in Minnesota gets very crowded. This is where precise IRA withdrawal amounts, Roth conversions done before claiming Social Security, and qualified charitable distributions (which aren't included in AGI) pay off.

Public and military pensions: two special subtractions

Public pension subtraction. If you earned a government pension from work that wasn't covered by Social Security (for example, PERA Police and Fire, State Patrol, "basic" members of PERA or TRA, or federal civil service under the older system), you may subtract part of it on Schedule M1QPEN. For 2026 the maximum is $27,690 joint and $13,850 for other filers, with a phase-out starting at $110,780 joint and $86,410 single or head of household AGI. DOR's web page still shows older amounts, so use the 2026 inflation table.

Military pension subtraction. Federally taxable military retirement pay for active or reserve service, plus Survivor Benefit Plan payments, can be subtracted from Minnesota income. You can't take this subtraction and also claim the Credit for Past Military Service, so compare the two.

There's also a subtraction for people 65 or older or disabled with low income (Schedule M1R). For 2025 it required income under $42,000 for a couple both 65 or older and nontaxable Social Security under $12,000, so few retirees with meaningful Social Security qualify.

Property tax refunds for homeowners

Minnesota's Homestead Credit Refund (Form M1PR) gives homeowners a refund of part of their property tax based on household income. For 2025 refunds (filed in 2026), the maximum was $3,480, it shrinks as income rises ($680 at the top of the range), and households with income of $142,490 or more aren't eligible. Household income for the refund has its own definition, so don't assume it equals AGI.

There's also a special refund with no income limit if your property tax rose at least 12% (and at least $100) from the prior year on a home you owned and lived in on January 2 of both years. Older homeowners can also ask DOR about the Senior Citizens' Property Tax Deferral Program; check the eligibility rules before counting on it.

Estate tax: Minnesota starts at $3 million

Minnesota has its own estate tax, and the exemption is much lower than the federal one. A Minnesota estate tax return is required when the gross estate exceeds $3,000,000 for deaths in 2020 or later. The federal filing threshold for 2026 is $15,000,000. Minnesota's estate tax rates run from 13% to 16%.

A paid-off home, a couple of retirement accounts and some life insurance can add up to $3 million faster than you'd expect. If that's you, the estate plan deserves as much attention as the withdrawal plan.

Residency, estimates and leaving the state

You're a Minnesota resident if Minnesota is your permanent home, or if you spend 183 days or more in the state and you or your spouse maintain an abode there (a house, condo, apartment or year-round cabin with cooking and bathing facilities). Larry's "still lives in Edina" story works for him now, but if he moves to Arizona and keeps the Edina house, he'll need to show the move was real and count his days carefully. See the residency change guide, and compare neighbors in the Illinois and Michigan guides or the state tax move calculator.

If you'll owe $500 or more after withholding and refundable credits, make estimated payments. To avoid a penalty you need to pay 90% of this year's tax or 100% of last year's (110% if your AGI was over $150,000). Payments are due April 15, June 15, September 15 and January 15.

A Minnesota early-retirement checklist

• Before claiming Social Security, consider Roth conversions; there's no subtraction to lose yet.
• Once you're on Social Security, find your threshold ($110,780 joint for 2026) and stay below it, or well above it on purpose.
• Use qualified charitable distributions for giving after 70½ to keep AGI down.
• Public employees in basic plans and military retirees should claim their subtractions.
• Homeowners should check the Homestead Credit Refund each year.
• Make estimated payments if you'll owe $500 or more.
• If your estate could top $3 million, plan for Minnesota estate tax.

Everything here comes from Minnesota Department of Revenue publications as of October 29, 2026. The 2026 Schedule M1M wasn't published yet, so the step-by-step phase-out mechanics come from the 2025 worksheet; check for changes before you file. Tax computed here uses the rate schedule; DOR's tax tables may differ by a few dollars. This is general education, not personalized advice.