Minnesota 2026 Tax Changes — What Residents & Business Owners Must Know
Starting January 1, 2026, major federal tax changes take effect as temporary provisions expire and updated legislation continues.
Minnesota residents — who pay a progressive state income tax — will feel these changes strongly because Minnesota begins its tax calculations with federal AGI.
These changes affect:
- W-2 earners in Minneapolis, St. Paul, Rochester, Duluth, Bloomington
- Healthcare, biotech, education, government, and corporate employees
- Small business owners, LLCs, freelancers, and S-Corp operators
- Real estate investors, landlords, and STR owners
- Families with children
- Retirees drawing taxable income
- Dual-income households
Below is what Minnesota taxpayers need to know about the 2026 transition.
Key Federal Changes Affecting Minnesota Residents
Standard Deduction Shrinks in 2026
Minnesota has:
- high housing costs in metro areas
- significant property tax burdens
- high childcare and living expenses
A smaller deduction increases federal taxable income — and therefore Minnesota taxable income as well.
Homeowners, families, and retirees will feel this the most.
Federal Tax Brackets Increase
- 12% → 15%
- 22% → 28%
- 24% → 31%
- dual-income households in the Twin Cities
- healthcare workers in Rochester (Mayo Clinic region)
- teachers and public employees
- engineers and tech professionals
- middle-income earners between $60K–$300K
Federal increases directly raise Minnesota’s state income tax base.
QBI (20% Business Deduction) Remains Federal; Minnesota Does Not Conform
QBI continues federally, but Minnesota does not apply the same deduction.
- Federal taxable income may decrease
- Minnesota taxable income does not
- Proper planning is required to balance federal vs Minnesota outcomes
- trades and contractors
- realtors and real estate professionals
- small business owners
- freelancers and gig workers
- LLCs and S-Corps
- service-based businesses
Child Tax Credit Shrinks
- Federal Child Tax Credit falls from around $2,000
- To roughly $1,000 per child
- Refundability reduces
Minnesota families — especially in Minneapolis/St. Paul suburbs, Rochester, and Duluth — will see smaller federal refunds.
Marriage Penalty Returns
Minnesota has one of the highest rates of dual-income professional households.
- joint filers will reach higher federal brackets sooner
- credit phase-outs tighten
- combined incomes may push families into more expensive tax positions
Couples earning $90K–$300K combined will see meaningful changes.
Minnesota-Specific Tax Considerations
1. Minnesota Uses Federal AGI as the Starting Point
Minnesota has a progressive state income tax structure.
- reduced deductions
- higher federal brackets
- lower federal credits
…increase Minnesota taxable income.
This affects most Minnesota households, especially in high-cost metro areas.
2. Real Estate Investors & Homeowners Will Feel 2026 Changes
- Minneapolis
- St. Paul
- Rochester
- Duluth
- St. Cloud
- Bloomington
- Eagan
- Eden Prairie
— will experience changes with:
- capital gains
- depreciation
- rental property classification
- STR participation rules
- timing for property sales or exchanges
Rising home values in many counties increase capital gains exposure.
3. STR (Short-Term Rental) Owners Must Prepare for Updated Rules
- Minneapolis
- Duluth (Lake Superior tourism)
- Rochester
- Brainerd Lakes area
- North Shore communities
- reduced bonus depreciation
- stricter participation requirements
- updated IRS safe harbor tests
- rental loss limitations
4. Retirement Income Remains Strongly Affected by Federal Rules
- some pension income
- IRA withdrawals
- 401(k) distributions
- investment income
Federal bracket increases directly raise total tax burden for retirees.
Who Is Hit Hardest in Minnesota (2026)
- Dual-income professional households
- Homeowners with mortgages and property taxes
- Business owners and contractors
- Real estate investors and landlords
- STR operators
- Families with children
- Retirees drawing taxable IRA/401(k) income
- Middle-income and upper-middle-income earners
What Minnesota Residents Should Do Before December 31, 2025
- Update federal and state withholding
- Maximize retirement contributions
- Consider Roth conversions
- Review business structure (LLC vs S-Corp)
- Prepare rental and STR documentation
- Evaluate capital gains exposure
- Time property or investment sales strategically
- Build a full 2025–2026 federal + Minnesota tax strategy
Minnesota 2026 Tax FAQ
Does Minnesota conform to QBI?
No — QBI is federal-only.
Will Minnesota taxes rise?
Rates stay the same, but taxable income increases due to federal changes.
Are families affected?
Yes — reduced credits and higher taxable income impact refunds.
Are STR owners affected?
Yes — depreciation and participation rules tighten.
Are retirees affected?
Yes — federal bracket increases raise tax on withdrawals and investment income.
Get a 2026 Minnesota Tax Strategy
Minnesota residents face meaningful 2026 changes due to reduced deductions, higher federal brackets, shifting credit eligibility, and rules affecting business owners, families, real estate investors, and retirees.
A personalized tax plan ensures you’re ready before the changes take full effect.