Kansans who worked in Kansas City, Mo., over the past three years could be in line for a very pleasant surprise: tax refunds worth hundreds of dollars.
It’ll take a little paperwork to get the money. But a new ruling from Topeka means Kansans who paid Kansas City’s 1 percent earnings tax over the past three years are eligible to get at least some of that money back.
In May, a divided U.S. Supreme Court said a state must offer its residents credit for income taxes they pay to jurisdictions outside their borders. To do otherwise, the court said, would illegally tax the same income twice.
On Aug. 10, the Kansas Department of Revenue said that ruling applies to the income taxes residents pay to local governments. That means Kansans who pay Kansas City’s earnings tax can now claim the payment as a credit against their Kansas tax bill, state officials say.
A Kansas resident earning $50,000 in Kansas City, for example, pays the city $500. Now, for the first time, the taxpayer can knock that $500 off his or her Kansas tax liability.
For several reasons, the new credit may not mean a great deal of additional money for Kansas taxpayers in this or future years. But taxpayers who worked in Kansas City while living in Kansas can file amended state returns for three years — 2012, 2013 and 2014 — and claim the new earnings tax credit in each.
Those taxpayers could be in line for refunds of part of their tax payments. Those refunds, from the state of Kansas, could amount to hundreds of dollars.
“It can sure be a substantial amount. It really can,” said Jackie Perlman, principal tax research analyst for the Tax Institute at H&R Block. “We could be talking about a nice refund, several hundred dollars. It’s great.”
Accountants and tax experts are scrambling to respond to the ruling. They expect thousands of Kansans who work in Kansas City to file amended returns, trying to get their hands on the cash.
Kansas state officials are also nervous. Kansas City collects about $180 million in individual earnings taxes each year. If, say, 20 percent of those payments come from Kansans — and if each taxpayer seeks and gets a full refund — it could cost the state $36 million to pay one year’s worth of refund claims.
Kansas already faces a tight budget. Massive refunds could make things worse.
“First and foremost, we have to be fair to the Kansas taxpayer,” said state Rep. Kathy Wolfe Moore, a Democrat from Kansas City, Kan. “But this has the potential to make an already disastrous financial situation much worse.”
Kansas Secretary of Revenue Nick Jordan, through his office, declined to comment.
While Kansas revenue officials are worried about the refunds, they also believe the impact of the ruling will be smaller than originally feared. Kansas taxpayers will likely qualify for a substantial refund only for the earnings taxes they paid in one year — 2012.
That’s because Kansas dramatically cut its income tax rates in 2013. That year, most Kansans who worked in Kansas City started paying more taxes to the state of Missouri than they owed in Kansas.
Last year, for example, one online tax calculator estimated a single person earning $50,000 who lived in Kansas but worked in Missouri paid roughly $1,933 in Missouri state taxes. The taxpayer owed Kansas only $1,833.
Kansas has long allowed a full credit for income taxes paid to other states. The $50,000 earner simply applied the $1,933 paid to Missouri to the $1,833 owed in Kansas, effectively lowering the Kansas obligation to zero.
Now the taxpayer can claim the additional $500 tax credit, giving the person $2,433 to apply to the Kansas bill. It won’t help, though, because the Kansas liability is already zero.
“Because of the Kansas rate cuts beginning in tax year 2013, the Missouri state income tax (including the Kansas City earnings tax) will be greater than the taxpayers’ Kansas income tax,” explained Jeannine Koranda, a spokeswoman for the Kansas Department of Revenue. That makes “the impact from including the KC earning tax in the credit computation minimal.”
That means earnings tax refunds for 2013 and 2014, the years after the tax cut, are likely to be small or nonexistent. Tax accountants say their clients should recompute their tax liabilities for those years but should not be surprised if any refund is just a handful of dollars.
The 2012 return, on the other hand, is likely to provide a big-league check.
Accountants said taxpayers who think they qualify should dig up their Kansas returns for all three years, then prepare and file amended returns. Taxpayers can refile on their own or consult an accountant. The Taxpayer Assistance Center in Topeka (785-368-8222) may also provide guidance.
Experts say Kansans shouldn’t wait too long to refile. Claims for refunds from the 2012 tax year must be filed by April.
There’s no estimate yet of how long it will take to process the amended returns and issue refund checks.
Kansas is the second state in the nation to adjust its tax credit system for local taxes, Perlman said. Maryland, which was a party in the Supreme Court case, was the first.
But the Kansas decision is likely to ripple across the country — and into Kansas City, which has concerns of its own.
The city isn’t on the hook for any of the refunds paid to Kansans. But some believe the city must now offer a similar credit to any of its residents who work in Kansas but pay the earnings tax — in effect, the reverse of the situation now confronting Topeka.
But it isn’t clear how that would work, or if Kansas Citians working in Kansas can file amended earnings tax returns for the relevant years. Kansas City officials said Thursday they’re still studying the issue and may have guidance later this year.