People might be surprised to see their take home pay decrease after July 1. Many Kansas households may be seeing lower paychecks for the first time today.
Lawmakers passed a $1.2 billion retroactive tax increase last month for the new two-year
budget window. Here’s a look at a few things taxpayers should know about upcoming tax increases, courtesy of Michael Austin Kansas Department of Revenue Chief Tax Economist.
What is the structure of this plan?
- Tax year 2017 will now have higher and additional income tax rates that must be applied to Kansan’s income. Those rates will be 2.9 percent, 4.9 percent and 5.2 percent from the previous rates of 2.7 percent and 4.6 percent.
- In tax year 2018, Kansas income tax rates will jump again, this time to 3.1 percent, 5.25 percent, and 5.7 percent.
- Kansans who own their own personal business will now have to pay state income taxes on their business income. Since 2013, those businesses paid state income taxes on the wages they gave themselves but not their business income.
- In tax year 2018, the child and dependent care tax credit would be restored and set at 12.5 percent of the federal credit. It will increase to 25 percent of federal amounts by 2020.
- Starting in tax year 2018, 50 percent of medical expenses will be allowed as itemized deductions. It will grow to 100 percent by 2020
- In tax year 2019, mortgage interest and property tax deductions will increase to 75 percent of federal allowable amounts. By 2020, 100 percent of federal amounts will be allowed.
What about people who earn a low wage? Current law had them not owing the state in income taxes. Does that continue?
The low income tax exclusion remains the same for 2017, however in tax year 2018, more of the 400,000 low income Kansans may be subject to the new and higher income tax rates. The exclusion will be lowered to $5,000 if married (from $12,500) and $2,500 (from $5,000) if single.
You mentioned changes to some credits and deductions, does that help limit the hit of the tax increase?
Yes, but there are caveats.
The child and dependent care tax credit will assist those who pay “work-related expenses” as defined by IRS’s Publication 503: Child and Dependent Care Expenses. This is a strict definition of child care expenses than what one would reasonably expect, and so not all Kansas taxpayers may receive it. In addition, the state credit takes effect in 2018, and so it cannot be used to offset the tax increases in 2017.
The changes in itemized deductions also take effect in tax year 2018 or later, so they will not help in minimizing the tax increase in tax year 2017 either. Latest statistics also show that 80 percent of Kansas taxpayers don’t use itemized deductions, as they can receive a larger tax reduction using standard deductions. Therefore once the changes in itemized deductions take place, it is possible the majority of Kansas taxpayers would not find a tax reduction from them.
You mentioned the tax increase is retroactive. What does that mean?
Senate Bill 30 specifies that for the entire tax year 2017, new tax rates shall be imposed on Kansans’ taxable income. However, since we are six months into 2017 and cannot have a semi-annual tax system without encouraging tax avoidance, the remaining six months of 2017 must withhold enough income tax so that state collections are equal to an entire year of the new 2.9 percent, 4.9 percent, and 5.2 percent rates.
So if Kansans have to ‘catch up’ so to speak, how much will be withheld from the average Kansans’ paycheck after July 1?
The percent increases from the previous tax rate to the new 2017 rates range from around 7 percent to 13 percent. However due to retroactivity, Kansans will experience double the percent increase in the last 6 months of the year in an effort to catch up. The Kansas Department of Revenue has provided tax notices and withholding tables to assist Kansans and their employers to better adjust withholdings from paychecks.
With this new tax increase, is the Kansas budget structurally sound?
The answer is no. A structurally sound budget is one where recurring revenues are equal to recurring expenses. Unfortunately, this new $1.2 billion retroactive tax increase still does not meet the record-breaking ongoing expenditures approved by the legislature. Therefore the Kansas Legislature is still relying on one-time revenue sources, like highway transfers and pension payment delays, to fill the shortfall gap. After the two-year budget cycle, the legislature will have to decide whether to cut spending, use more one-time revenue tricks, or raise taxes again.
What should individuals do if it looks like their employers aren’t withholding enough money from paychecks?
Although the withholding tables are designed to adjust paychecks according to law, Department of Revenue Secretary Sam Williams recommends individuals talk to their tax preparer to ensure the amount withheld is sufficient to meet their increased tax liability.
What about people who work for themselves? Is there something those folks should do to prepare?
Business owners should make estimated tax payments every quarter. The new tax law does not impose penalties or interest for underpayment on both individual and non-wage business income as long as it is paid in full by April 17, 2018. However, it is advisable business owners make the quarterly payments to avoid an enormous tax bill come April.
It seems the Kansas Department of Revenue is publicizing these tax changes more than usual. Why?
This tax increase has the potential to shrink the take-home pay of every working Kansan. So it’s important to know exactly what this new law does, so that Kansans can better manage their budget and finances.
Anything else taxpayers should know?
As always, filing electronically at ksrevenue.org is the fastest and simplest route. It will also have all the information needed for you to make the best decision possible regarding these tax increases. There is also a Taxpayer Assistance Center available to answer questions. Call (785)368-8222. It is our job at the Department of Revenue to ensure collections abide with the law. We will continue to strive to serve our customers with accuracy and respect.