A new tax bite is on its way for some Kansans, and it’s likely to come as a surprise. The increase will cost taxpayers a total of $97 million when they pay their 2015 income taxes.
In last spring’s tumultuous Kansas legislative session, the anguished decision by lawmakers to increase sales and cigarette taxes grabbed everybody’s attention.
But changes to state income tax deductions flew mostly under the public’s radar: Lawmakers lowered the mortgage interest and property tax deductions and repealed the deduction for medical expenses.
Critics are calling those changes a “back-door tax increase,” charging that they will amount to a tax sting for some middle-class taxpayers and a potential burden for some elderly people.
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For the 2015 tax year, the state deduction that is allowed for mortgage interest and real estate and personal property taxes is reduced to 50 percent of taxpayers’ federal itemized deductions. The state charitable deduction remains at 100 percent.
All other state itemized deductions were eliminated, including unreimbursed medical expenses.
That’s the one that worries Doug Himebaugh, a former banker who lives at a retirement community in Lenexa. He expects his state income tax bill to go up 15 percent because of the loss of the medical deduction, and he’s anxious about the impact on some of his neighbors.
A number of the residents are angry and concerned about it, he said. “They just don’t know yet how much to be concerned about it.”
But Rep. Marvin Kleeb, an Overland Park Republican and House tax committee chairman, said lawmakers agreed to the changes because the individual impact would be small. About 20 percent of Kansas tax filers use the mortgage interest and property tax deductions, and fewer claim the medical deduction, he said.
“We had hearings on the House side, with plenty of opportunity to discuss this, and we had virtually no opponents,” Kleeb said.
Federal income tax law says taxpayers can claim unreimbursed medical expenses if they exceed 10 percent of adjusted gross income (7.5 percent for people 65 and older).
Without that state medical deduction, elderly people paying for assisted living, which can cost thousands of dollars a month, will see their Kansas taxable income go up, said Michael Maddox, an Overland Park CPA.
Most of Maddox’s clients are homeowners and will be affected by the reduction in the mortgage interest and property tax deductions, he said.
“Some of these clients have significant mortgage interest, even somebody with a medium-sized home,” Maddox said. “When people receive their tax returns, they’re going to say, ‘Wait a minute, why do I owe Kansas so much?’ ”
Depending on an individual’s income, mortgage interest, and real estate and property taxes, he said, the tax bite could be anywhere from a few dollars to hundreds of dollars or more.
Reducing deductions was part of a tax plan by Republican Gov. Sam Brownback and legislative allies to help pay for reduced overall tax rates. The plan was to gradually reduce itemized deductions.
But with a budget shortfall heading into the hundreds of millions of dollars, the Legislature in the 2015 session not only passed increases in sales and cigarette taxes but sped up deduction changes and did away altogether with others.
Steve Stotts, Kansas director of taxation, said the mortgage interest deduction had been scheduled to drop from 65 percent to 50 percent in tax year 2017 rather than 2015.
Medical and some other deductions, such as casualty and theft, would have been set at 50 percent for 2015 rather than being eliminated.
Meanwhile, the reduction in tax rates, meant to offset the loss of deductions, was “decelerated.” The tax rate of 2.7 percent for the bottom tax bracket and 4.6 percent tax bracket were kept through tax year 2017.
“We expect to collect $97 million more revenue in fiscal 2016 because of the reduction of itemized deductions in 2015,” Stotts said.
Kleeb said lawmakers considered it important to keep charitable deductions at 100 percent and to make changes that wouldn’t hurt lower-income Kansans.
“Basically it’s the wealthier taxpayers who are the ones impacted by a change in itemized deductions, so it’s considered a progressive tax policy,” he said.
Kleeb said lawmakers also wanted to consider tax changes that would cause the least damage to the economy.
“This was viewed as a very low-damage policy,” he said.
Annie McKay, executive director of the Kansas Center for Economic Growth, which has opposed the Republican tax plan, said the additional revenue will come from higher earners but also middle-income taxpayers, generally from the top 60 percent of Kansas earners.
Individual impact is difficult to calculate because it depends on people’s income level and circumstances, she said.
The original tax plan, a gradual lowering of deductions to offset tax rate reductions, wasn’t working because “we were hemorrhaging money as a state,” McKay said.
“So the Legislature and the governor had to go out and find some money pretty immediately, and one of those sources was itemized deductions,” she said.
“By and large, this is not a win for the average Kansas family,” McKay said. “And at the same time, the state continues to find itself in a fiscal crisis.”
AARP Kansas, which offers tax preparation assistance, has yet to assess the impact of the 2015 changes, said director Maren Turner.
“There are older people who count on certain deductions,” Turner said. “We’ve told the Legislature that these tax policies can have a negative impact not only on older people but on families.”
The deductions are popular, said Senate Minority Leader Anthony Hensley, a Topeka Democrat and member of the Senate tax committee.
“A lot of people are going to be surprised by these changes,” he said.
The tax policy doesn’t work and it’s not fair, said Hensley, citing a loophole that allows some 300,000 small-business owners to avoid tax liability.
“The medical deduction, the mortgage interest deduction, really will hit the hardest on the middle class,” he said. “It’s at their expense. They’re paying for the tax cuts for the rich.”