Federal tax reform continues to be a hot topic in the news and is high on President Trump’s agenda. Whether we’ll see any tax reform or tax rate cuts pass remains debatable, but most agree some form of change is needed.
At the state level, tax policy changed in 2017. On June 6, the Kansas Legislature overturned Gov. Sam Brownback’s veto of Senate Bill 30, enacting into law several significant changes affecting bank shareholders.
Below is an outline of Trump’s current tax reform proposal and the changes to Kansas state tax for 2017. To keep updated on tax changes, visit our thought center.
Trump’s Most Recent Proposal
On April 26, Trump released his plan for tax reform. Gary Cohn, Trump’s chief economic advisor, called the proposal “one of the biggest tax cuts in American history” and said it would “cut taxes for business to make them competitive, and … cut taxes for the American people—especially low- and middle-income families.”
Proposals that affect S corporation bank shareholders include:
- Collapse the seven current individual income tax brackets, which range from 10 percent to 39.6 percent to the following brackets for married-joint filers*:
- Less than $75,000: 10 percent
More than $75,000 but less than $225,000: 25 percent
More than $225,000: 35 percent
* Brackets for single filers are half these amounts
- Retain the current preferential capital gain rates
- Double the standard deduction
- Repeal the estate tax (While not specifically addressed in the most recent proposal, a tax on capital gains held until death was proposed during the campaign.)
- Reduce the top tax rate on pass-through business income retained at the S corp level to 15 percent (While this proposal was not specifically addressed in Trump’s most recent guidelines, distributions from pass-through entities would presumably be taxed as a dividend.)
- Repeal the 3.8 percent net investment income tax and alternative minimum tax (AMT)
- Eliminate all itemized deductions except mortgage interest and charitable contributions
For C corporation banks:
- Reduce corporate income tax rates to a flat 15 percent
- More generous expensing of capital assets (While not specifically addressed in Trump’s April 26 proposal, allowing “unprecedented capital expensing” was included in the July 27 Joint Statement on Tax Reform issued by Republican leaders in the White House and Congress.)
- Eliminate AMT
Kansas Tax Law Changes for 2017
Kansas House Bill 2117, which passed in 2012, made significant changes to tax policy beginning in 2013. The most notable change was that pass-through income reported on federal Schedules C, E and F was tax-exempt. The overturned veto of SB 30 ended this exemption and implemented other changes, including:
- Repealed exemption of certain types of income, including Schedule C (business income), Schedule E (rental income and income from pass-through entities such as S corps, partnerships, estates and trusts) and Schedule F (farm income)
- Increased individual tax brackets from the 2.7 percent and 4.6 percent brackets in 2016, as follows:
- Tax year 2017 – 2.9 percent, 4.9 percent, 5.2 percent
Tax year 2018 – 3.1 percent, 5.25 percent, 5.7 percent
- Gradually increased allowable Kansas itemized deductions for medical expenses, mortgage interest and real estate/personal property taxes after 2017
These changes were retroactively enacted to the beginning of 2017. Taxpayers won’t be charged penalties and interest for underpayment of estimated taxes associated with these changes for the 2017 tax year, as long as all tax due is remitted by April 17, 2018.
Although these changes will affect many Kansas bank shareholders, the tax treatment of S corp bank earnings in Kansas will remain consistent with prior years. Banks will continue to file and remit taxes on Form K-130, Kansas Privilege Tax Return. Bank shareholders will still receive a deduction for earnings taxed on Form K-130.
Contact your BKD advisor if you have questions.