Kansas legislature overrides veto, enacts income tax rate increase

The Kansas Legislature has overridden Gov. Sam Brownback’s veto of a bill that makes a number of changes to personal income taxes, including repealing the exemption for non-wage business income and increasing personal income tax rates.

Personal income tax rates.

Under the legislation, personal income tax rates would be increased beginning in tax year 2017 by replacing the two-bracket system with a three-bracket system. For married individuals filing joint returns with taxable income above $60,000 and all other filers with taxable income above $30,000, a top bracket is created with a tax rate of 5.2% for tax year 2017 and 5.7% for tax year 2018 and all tax years thereafter. The bottom brackets are increased to 2.9% (previously, 2.6%) and 4.9% (previously, 4.6%) for tax year 2017 and further increased to 3.1% and 5.25% for tax year 2018 and all tax years thereafter. The legislation also repeals additional formulaic provisions that would have provided for rate reductions in certain future years based on growth in selected State General Fund tax receipts.

Business income exemption.

Effective for tax year 2017, the legislation repeals the exemption for certain non-wage business income (income reported by pass-through entities and sole proprietorships on federal Schedules C, E, and F and lines 12, 17, and 18 on federal Form 1040) by eliminating the addback of certain business losses and the corresponding subtraction for specified business profits that the taxpayer reported for federal income tax purposes.

Child and dependent care credit.

The legislation restores a child and dependent care tax credit that had been repealed in 2012 in an amount equal to 12.5% of the allowable federal amount for tax year 2018, and then incrementally increased to 18.75% for tax year 2019, and 25% for tax year 2020 and all tax years thereafter.

Itemized deductions.

Under the legislation, personal income taxpayers are permitted to claim 50% of medical expenses currently allowed as itemized deductions under federal law for tax year 2018 as an itemized deduction. This amount increases to 75% of the federal allowable amount for tax year 2019 and to 100% for tax year 2020 and thereafter. Itemized deductions for mortgage interest and property taxes paid are also increased from 50% of the federal allowable amounts to 75% for tax year 2019 and to 100% beginning in tax year 2020.

Low-income exclusion threshold.

Under the legislation, the low-income exclusion threshold is reduced from $12,500 to $5,000 for married taxpayers filing joint returns and from $5,000 to $2,500 for single filers for tax years beginning in 2018 and all tax years thereafter.

Other adjusted gross income modifications.

Effective for tax years beginning after 2016, the additions to federal adjusted gross income required by taxpayers computing Kansas personal income tax liability for the amount of any deduction for domestic production activities under Code Sec. 199; self-employment taxes under Code Sec. 164(f) any deduction for pension, profit-sharing, and annuity plans of self-employed individuals under Code Sec. 62(a)(6); and any deduction for health insurance under Code Sec. 162(l) are repealed. Special subtraction modification provisions relating to net gains from certain livestock and Christmas tree sales are also repealed. Effective for tax years beginning after 2016, the federal net operating loss deduction claimed on the taxpayer’s federal income tax return is no longer required to be added back to federal adjusted gross income in computing Kansas adjusted gross income. (S.B. 30, Laws 2017, vetoed by Governor Brownback on June 6, 2017, veto overridden by Kansas Senate and House of Representatives on June 6, 2017, effective July 1, 2017 except as noted above.)

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