Federal Net Investment Income

Federal net investment income includes but is not limited to: 

• Interest 
• Dividends 
• Capital gains 
• Rental and royalty income 
• Non-qualified annuities 
• Deductions allocated to the items of gross investment income 
• Income from businesses that are:
  • Involved in trading of financial instructions or commodities
  • Passive activities to the taxpayer, as defined by Internal Revenue Code, section 469

Minnesota Net Investment Income

Minnesota net investment income is federal net investment income but does not include:

• Net gains from the sale of class 2a agricultural property located in Minnesota 
• Net interest or mutual fund dividends from U.S. bonds

Class 2a agricultural land is defined as parcels or portions of property that are agricultural land and buildings. If the property has multiple classifications and the county assessor can practically separate the acreage of each classification type, only the acreage that is attributable to class 2a may be excluded from the Minnesota NIIT.

Interest or mutual fund dividends from U.S. bonds includes:

• U.S. bonds, bills, notes, savings bonds, and certificates of indebtedness
• Sallie Mae bonds
• Dividends paid to you by mutual funds that are attributable to these bonds
• U.S. government interest and dividends you received as a partner of a partnership, shareholder of an S corporation, or beneficiary of a trust

Nonresidents are subject to Minnesota NIIT based on their net investment income allocated to Minnesota.

Note: The credit for taxes paid to another state cannot be claimed against Minnesota NIIT.

The Minnesota NIIT is subject to the same estimated tax provisions as other individual, estate, or trust taxes. If you expect to be subject to Minnesota NIIT, you should adjust your income tax withholding or estimated payments to avoid underpayment penalties.

Minnesota NIIT must be reported and paid on either:

• Form M1, Individual Income Tax
• Form M2, Income Tax Return for Estates and Trusts

Composite Income and Pass-Through Entity Tax (PTE)

Minnesota NIIT cannot be reported and paid as part of a composite income or PTE tax election. Composite income and PTE tax can still satisfy the partner’s or shareholder’s tax for the distributive share of the entity’s business income.

For Form M1 filers only

Partners and shareholders electing composite income or PTE tax to satisfy their filing requirement must file Schedule NIIT, Net Investment Income Tax, with Form M1 if their investment income exceeds $1 million. In these situations, the Form M1 will only report the NIIT.