The Kansas legislature has finalized the rollback of the previous tax cuts implemented in 2013. In general, the new law is retroactive to January 1, 2017, but new individual tax rates will be phased in over 2 years and itemized deduction allowances will be increased through 2020. The law also eliminates the “march to zero” statute, whereby future individual income tax rates were to continue to decrease if state revenues did not drop.
Perhaps the biggest impact to individuals is the rollback of the exemption for business income. Since 2013, income from self-employment, S-Corporations, partnerships, rental and farm income was totally exempt from tax and subtracted from the income the individual reported for Federal tax purposes to arrive at the individual’s adjusted gross income (AGI) for Kansas State tax purposes. However, beginning in 2017, these items will no longer be subtracted in arriving at Kansas AGI.
Additionally, numerous other modifications to Federal Income will be eliminated so that Kansas AGI will track more closely with Federal AGI. There will still be a few additions, (e.g. out-of-state municipal income) which existed prior to the 2013 tax law. Most subtractions will now track Federal Tax Law. For example, net operating loss deduction, 50% of self-employment tax, self-employed retirement contributions and health insurance will all be reinstated as subtractions from Federal Income to arrive at Kansas AGI.
Individual tax rates will be increased and another tax bracket will be added for income above $60,000. For 2017, income up to $30,000 will now be taxed at 2.9%, up from 2.7%, and rising to 3.1% in 2018. Income between $30,000 and $60,000 will be taxed at 4.9% in 2017, rising to 5.25% in 2018. Income above $60,000 will be taxed at 5.2%, rising to 5.7% in 2018. Previously, income greater than $30,000 was taxed at 4.6%.
Itemized deductions will be modified to offset the higher tax rates by increasing the percentage of Federal deductions allowed against Kansas AGI. For 2017, deductible percentages will be unchanged from the amounts set in the 2013 law. However, in 2018, a deduction of 50% of the Federal deduction for medical expenses will be added. By 2020, deductions for charitable contributions, medical expenses, mortgage interest, and taxes will all be 100% of the Federal amount.
Last, recognizing that this retroactive change occurred in midyear, Kansas will not assess penalties or interest on underpayments resulting from these changes, provided the additional tax is paid before April 17, 2018.
Any taxpayer expecting a significant increase in 2017 Kansas income tax will want to consider paying the additional tax before December 31, 2017 to get a 2017 deduction and to minimize exposure to AMT in 2018.
Whether or not you are affected, we are happy to answer any questions you may have about these new tax laws. Simply reach out to your Moneta Group advisory team for assistance!