Tax

Kansas Legislation Means Significant Tax Changes

June 2012
Author:  Jim Matthews

Jim Matthews

Managing Consultant

1201 Walnut Street
Suite 1700
Kansas City, MO 64106-2246

Kansas City
816.221.6300

On May 22, 2012, Kansas Governor Sam Brownback signed House Bill 2117, which provides massive tax cuts he says will boost the economy and create jobs. Key features of this legislation are the elimination of state income taxes on small business and farm income claimed on individual returns, as well as reductions in individual income tax rates and brackets. It also increases the standard deduction for married and head of household taxpayers, eliminates certain losses, deductions and credits for individuals and makes other tax changes. The press release issued when the legislation was signed indicates the bill is expected to cut Kansas state income tax rates by 14 percent to 24 percent and eliminate Kansas state income taxes for more than 191,000 small business owners.

New Small Business Income & Farm Income Subtractions

After 2012, there will be a subtraction deduction available on certain nonwage business income for small business owners—income reported by LLCs, S corporations and sole proprietorships—and farmers. These new subtraction modifications will be allowed for the following:

  • Net profit from business as reported on Line 12 of Form 1040 from federal Schedule C
  • Net income from rental real estate, royalties, partnerships, S corps, estates, trusts, residual interest in real estate mortgage investment conduits and net farm rental, as reported on Line 17 of Form 1040 from federal Schedule E
  • Net farm profit from as reported on Line 18 of Form 1040 from federal Schedule F

Individual Income Tax Changes

Income Tax Rates Reduced – Starting in 2013, the individual income tax rate brackets for married individuals filing joint returns will be as follows:

  • Filing as an Individual 
    • Now
      • 3.5 percent of taxable income, for taxable income less than $15,000
      • $525 plus 6.25 percent of excess over $15,000, for taxable income between $15,000 and $30,000
      • $1,462.50 plus 6.45 percent of excess over $30,000, for taxable income more than $30,000
    • Starting in 2013
      • 3 percent of Kansas taxable income for taxable income up to $15,000
      • $450 plus 4.9 percent of the excess over $15,000, for taxable income over $15,000
  • Filing as a Married Couple
    • Now
      • 3.5 percent of taxable income, for taxable income of less than $30,000  
      • $1,050 plus 6.25 percent of excess over $15,000, for taxable income between $30,000 and $60,000
      • $2,925 plus 6.45 percent of excess over $60,000, for taxable income more than $60,000
    • Starting in 2013
      • 3 percent of Kansas taxable income for taxable income up to $15,000
      • $450 plus 4.9 percent of the excess over $15,000, for taxable income over $15,000

Increased Standard Deduction – Starting in 2013, the Kansas income tax standard deduction will be as follows:

  • $3,000 for a single individual
  • $9,000 for a couple filing jointly—currently $6,000
  • $9,000 for a head of household—currently $4,500

Additions to Federal Adjusted Gross Income – After 2012, the following will have to be added to federal adjusted gross income in determining Kansas taxable income:

  • Federal Schedule C business losses reported on Line 12 of Form 1040
  • Federal Schedule E losses from rental real estate, royalties, partnerships, S corps, estates, trusts, residual interest in real estate mortgage investment conduits and net farm rental reported on line 15 of Form 1040
  • Federal Schedule F farm losses reported on line 17 of Form 1040
  • Any deduction for self-employment taxes under Internal Revenue Code (IRC) Section 164(f), as in effect January 1, 2012
  • Any deduction for pension, profit sharing and annuity plans of self-employed individuals under IRC §62(a)(6), as in effect January 1, 2012
  • Any deduction for health insurance under IRC §162(l), as in effect January 1, 2012
  • Any deduction for domestic production activities under IRC §199, as in effect January 1, 2012

Reduction/Elimination of Certain Subtractions from Federal Adjusted Gross Income – After 2012, the following changes to subtractions in computing Kansas adjusted gross income will be in effect: 

  • The subtraction modification for income or loss of S corp stockholders of banks and savings and loans associations shall exclude the portion of income or loss reported on federal Schedule E and included on line 17 of the stockholder’s Form 1040.
  • The subtraction modification for premium costs for qualified long-term care insurance contracts is eliminated.

No Kansas Net Operating Losses and Investment Expense Deductions – Starting in 2013, the state’s net operating loss and expense deductions for investment expenditures no longer will be available to individual Kansas income tax filers.

Individual Income Tax Credits Repealed – Starting in 2013, the following income tax credits no longer will be available to individuals for Kansas income tax purposes, though some may remain available for corporations:

  • Abandoned well plugging
  • Adoption expenses
  • Agritourism
  • Alternative fuel equipment expenditures
  • Assistive technology
  • Certain temporary assistance to family contributors
  • Child and dependent care expenses
  • Child day care expenses
  • Disabled access expenditures
  • Environmental compliance expenditures
  • Food sales tax rebates
  • Individual development account contributions
  • Law enforcement training center contributions
  • Port authority contributions
  • Small employer health benefit plan contributions
  • Swine facility improvement expenditures
  • Telecommunications property tax payments
  • Venture capital contributions

Any of the repealed credits listed above that are applicable to the Kansas income tax imposed on individuals, nonrefundable, earned in any tax year prior to 2013 and remain unused after 2012 can be claimed in later years; they remain subject to any limitations applicable when the credits were earned.

Resident’s Credit for Income Taxes Paid to Another State – Starting in 2013, this Kansas income tax credit will take into account only income taxes paid in another state on income that it included in the resident’s Kansas adjusted gross income.

Part-Year Resident’s Kansas Income Tax Liability – After 2012, a part-year resident of Kansas can elect to compute Kansas income tax liability as if he or she were a Kansas resident for the entire year—in which case he or she can claim credit for income taxes paid to another state as if he or she were a full-year resident—or as if he or she were a nonresident for the entire year, in which case specific modifications will be necessary when computing Kansas income sources and credit for income taxes paid elsewhere.

Non-Income Tax Changes

Kansas Sales Tax Increase to Expire – While anticipated to be addressed in this legislation, no change has been made to hold the current Kansas state sales tax rate at 6.3 percent. Absent activity in the interim, the Kansas state sales tax rate will become 5.7 percent on July 1, 2013.

Homestead Property Tax Refund – After 2012, renters no longer will be eligible to participate in the state homestead property tax refund.

Severance Tax Exemption – Starting July 1, 2012, the state tax exemption for the severance and production of oil from any pool from which oil was first produced on or after July 1, 2012, and from which the severance and production of oil from such pool does not exceed 50 barrels per day, will be eliminated.

For more information on how these changes could affect your organization, contact your BKD advisor or Bryan Neuendorf.