Minnesota lawmakers are racing against the clock to decide whether the state will match federal tax changes that eliminated income taxes on overtime and tips, a decision complicated by the fact that 570,000 residents have already filed their 2025 tax returns. The legislature has until its May session end to act, but tax season closes April 15, leaving a narrow window that could force mass amendments if conformity passes.
The federal changes stem from the One Big Beautiful Bill signed by President Donald Trump in summer 2025, which removed or reduced federal income taxes on overtime and tip income for millions of Americans. Minnesota’s tax code currently conforms to the federal Internal Revenue Code as of May 1, 2023, meaning these newer provisions don’t automatically apply at the state level.
“Affordability is top of mind for Minnesotans,” Republican House Speaker Lisa Demuth said during a Minnesota Chamber of Commerce panel discussion Tuesday. “One of the ways we can make things a little easier on families and on people is conforming to things such as no tax on tips. No tax on overtime.”
The Budget Impact
DFL Senate Majority Leader Erin Murphy pushed back on immediate conformity, pointing to substantial revenue losses. “Tax conformity, while relief for people, is a cost to our budget,” Murphy said. “So, I think we have to consider all of those things.”
The Minnesota Department of Revenue estimates eliminating state income taxes on overtime would cost $366 million in state revenue during the 2026-27 biennium. Removing taxes on tip income would cost an additional $126 million over the same period, bringing total projected losses to $492 million.
These figures represent a significant portion of state revenue at a time when Minnesota already carries some of the highest individual and corporate tax rates in the nation. The state also faces rising property tax assessments and increased unemployment insurance costs, adding pressure to the budget debate.
Amendment Complications for Early Filers
The timing creates an unusual administrative challenge. Minnesota Revenue Commissioner Paul Marquart told the Senate Tax Committee Wednesday that as of early February, roughly 18 percent of the state’s 3.1 million expected filers had already submitted their 2025 returns.
“If a conformity package was to be passed and enacted into law, we would at the Revenue Department ask taxpayers to amend,” Marquart said. Those 570,000 early filers would need to file amended returns to claim any state tax relief on overtime or tips earned in 2025, a process that typically takes additional time and effort.
The situation mirrors complications seen in other states following the federal bill. Michigan decoupled from most One Big Beautiful Bill changes through legislation in October 2025 but offered penalty waivers for corporate estimated payments due to the complexity. Indiana took a different approach, selectively conforming to specific provisions through new legislation that updated its conformity date from January 1, 2023 to July 4, 2025.
Minnesota requires taxpayers who amend their federal returns under the One Big Beautiful Bill to notify the Department of Revenue if their state tax liability remains unchanged, detailing which specific section of the federal law affected their filing. This notification requirement adds another layer of compliance for residents navigating the federal-state tax mismatch.
Business Community Pressure
Small business advocates are pushing for conformity as part of broader tax relief goals. The National Federation of Independent Business Minnesota has made updating state conformity a top priority in its 2026 Main Street Agenda, arguing that alignment would allow businesses to take full advantage of federal changes.
“Lawmakers should prioritize conformity updates to allow small businesses to take full advantage of recent federal changes,” said Jon Boesche, NFIB Minnesota state director. The organization is also advocating for lower individual and corporate tax rates and property tax levy limits.
The conformity debate intersects with another expiring tax provision affecting business owners. Minnesota’s elective Pass-Through Entity tax, created as a workaround to federal state and local tax deduction limits, expires after December 31, 2025. The state did not automatically adopt the One Big Beautiful Bill’s retention of the SALT cap, meaning the PTE tax sunset proceeds as originally scheduled.
Minnesota residents who paid PTE taxes in other states will lose credits for those payments starting in 2026, potentially facing double taxation on multi-state income since Minnesota taxes all resident income regardless of source. Business owners are reassessing their entity structures and considering alternatives like filing personal nonresident returns or composite filings in other states to preserve some federal deductions.
Moving Forward
The legislature’s session ends the third week of May, more than a month after the April 15 tax filing deadline. If lawmakers don’t act before tax day, Minnesotans will continue paying state taxes on overtime and tip income for 2025, and early filers will have already locked in their state tax obligations based on current law.
Republican leaders have positioned tax conformity as a central affordability measure for the 2026 session, while DFL leaders are weighing it against budget priorities. The debate represents one of five major issues facing the divided legislature this session.
For taxpayers, the uncertainty means filing 2025 returns based on current Minnesota law that doesn’t conform to the federal overtime and tip tax elimination. Those who earn significant overtime or tip income should monitor legislative developments through the Department of Revenue website, as any conformity package passed after filing would require amended returns to claim state tax relief.
States across the country are navigating similar decisions as they determine which federal tax changes to adopt and which to reject, creating a patchwork of state tax codes that increases compliance complexity for businesses operating in multiple jurisdictions. The National Federation of Independent Business has advocated nationally for states to update their conformity provisions to reduce this administrative burden on small employers.
Source
Income from overtime, tips still taxable in Minnesota unless lawmakers act | KSTP.com