How the new state tax law affects you

Kansas Statehouse in Topeka, February 2014.

? Supporters of the sweeping tax change that Kansas lawmakers passed this year are calling that bill a return to normalcy and the end of an ill-advised experiment, while critics are calling it the largest tax hike in state history and a threat to the state’s future prosperity.

To be sure, the new tax law, which lawmakers passed over Gov. Sam Brownback’s veto, will have a significant financial impact on most Kansas taxpayers. But how much of an impact it will have depends on each individual’s particular circumstances.

Working parents at the lower end of the pay scale probably will see little or no change in their tax situation after the state’s new tax law takes effect July 1, and some may actually see their tax bills reduced, according to an analysis by the Journal-World.

But wage earners in the upper end of the pay scales could see tax hikes in the range of 15-20 percent or more. And people who are self-employed or are part of a partnership or other entity that has been exempt from state taxes the last four years should probably start bracing themselves now for a significant tax bill coming due next April.

“It certainly is going to be a change for most people here,” said Jackie Perlman, principal tax research analyst with The Tax Institute at H&R Block. “It rolls back many of the changes that were made in 2012 and 2013. It is going to affect most people in the state and it certainly is a big deal, big news.”

Perlman was referring to the tax law, which reverses course on many of the income tax cuts that Brownback championed in 2012 and 2013.

Most notably, it repeals the so-called “LLC loophole” that completely exempted income derived from certain kinds of “pass-through” business operations where the income of the business is the personal income of the business’ owner. That applied to more than 330,000 farms, law firms, medical practices and other similar businesses.

That part of the new tax law is retroactive to Jan. 1, 2017.

For regular wage earners, starting July 1, the new law reinstates a three-tiered tax structure and raises individual rates across the board. Currently the state taxes the first $15,000 of individual income, or $30,000 for a couple filing jointly, at 2.7 percent. Income above those thresholds is taxed at 4.6 percent.

Under the new tax law, that lower rate rises to 3.1 percent, and the second rate rises to 5.25 percent. But the new law also adds a third, upper income bracket at $30,000 for individuals, or $60,000 for married couples filing jointly. Income above those amounts will soon be taxed at 5.7 percent.

Those rates, while all higher than the current rates, are still lower than the pre-2012 tax rates of 3.5 percent, 6.25 percent and 6.45 percent respectively.

At the same time, however, the new law also restores certain tax credits and deductions that were eliminated under the 2012 plan, although the restoration of some credits and deductions is phased in over the next three years. Chief among those for lower-income parents is the child and dependent care tax credit, which reimburses them for a portion of the money they must spend on child care in order to work.

Critics of the law have already started calling it “the largest tax increase in state history” because it is estimated to generate $1.2 billion in new revenue over the next two years.

To get a sense of how the law would affect different people, the Journal-World built hypothetical scenarios using the tax rates that were in place last year, and the new rates taking effect July 1.

Those scenarios are based on assumptions that the filers would take the standard deductions and personal exemptions allowed under the law, as well as credits available to certain tax filers. And for working parents, it assumes they claim the maximum child care expenses allowed under federal law.

But there are many other factors that could affect any individual’s own tax situation, such as deductions for home mortgage interest or certain medical expenses, which the following analysis does not take into account.

A single parent with two children earning $25,000 a year, for example, would see no change in his or her tax liability. That’s because this person qualifies for enough tax credits that he or she would not have any tax liability at the end of the year, either under the current tax law or the new one.

A married couple with two children, filing jointly, with $50,000 of income would pay a little bit more next year, but would end up saving money as restoration of the child and dependent care tax credit is phased back in.

“The lower-income people are not going to feel it as much,” Perlman said. “If you look at the change from the two- to the three-bracket system and where it breaks, if your Kansas tax is pretty low, it’s just not that big of an effect. It increases as your income increases.”

For example, if that same married couple claims $100,000 in taxable income, they would see their taxes go up 13 percent over the next two years, mainly because $40,000 of that income would be taxed at the highest rate of 5.7 percent.

For single individuals with no dependents, the impact is even more pronounced, especially for those with higher incomes.

A single person fresh out of college making $30,000 a year, for example, would see his or her tax bill go up nearly 14.5 percent.

If that person’s income rises to $70,000 a year, the tax bill jumps more than 20 percent, and at $150,000 in taxable income, the tax bill shoots up more than 22 percent.

But those who will feel the impact of the new tax law the most are those who, since 2012, have not been taxed at all on their non-wage business income. When the current tax year started on Jan. 1, those people all assumed that their business income would be exempt from state taxes this year, and therefore have not been making the quarterly estimated payments they otherwise would have made.

Under the new law, however, all of that income will be taxable this year, even though those people will only have six months to plan for it.

Perlman noted that the new law does give those people some breathing room because it provides that no interest or penalties will be assessed for any underpayment that is solely the result of the mid-year tax law change.

“That doesn’t mean it’s not a good idea to take a look at it and see what your impact is, and maybe beef up your estimate,” Perlman said. “I would recommend that, just so your blow is softened a little bit come tax time. But also know you’re not going to be penalized for it.”

Also, for people who work a regular job and have a cottage business on the side, the new law restores their ability to deduct net operating losses of the business from their total Kansas income, something they have not been able to do since 2012.

Perlman said that professional tax preparers like H&R Block are still waiting for detailed guidance from the Kansas Department of Revenue before offering specific advice to those business owners. In the meantime, however, she said those people would do well to visit with a tax advisor to discuss the impact of the new law.

“Certainly going to a calculator or going to your tax adviser and saying, ‘Hey what does this mean to me and how much tax will I pay next April?’ and getting ready for it,” would be advisable, Perlman said.