How to deal with retroactive Kansas state tax changes proactively
When Kansas passed tax legislation last month, some of the changes were retroactive to the start of 2017. The bad news is that means thousands of taxpayers may have underpaid their taxes from January through June. The good news is that they won’t face penalties and interest for that underpayment like they normally would, as long as they pay their tax bill by the April filing deadline.
However, that still leaves taxpayers – especially small business owners who report income on Schedule C, E or F – with potentially large tax bills they weren’t expecting to pay.
For example, in one scenario provided by The Tax Institute at H&R Block, a married couple filing jointly with $70,000 in self-employment income and $30,000 in employee wages would see their Kansas liability increase from $486 in 2016 to $2,004 in 2017.
Meanwhile, a family of four with $70,000 in employee wages would see their Kansas taxes increase from $1,891 in 2016 to $2,022 in 2017.
“Although there won’t be a penalty for waiting until April to pay, there may be an advantage to tackling that extra tax bill early,” said Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block. “Summer is already a perfect time for tax planning. With six months to review and six months to forecast, taxpayers have a good idea of how the year is shaping up and how state tax changes could affect them. They also have enough time to make course corrections more meaningful and less painful.”
Perlman suggests taxpayers will have different ways to deal with their new tax liability depending on their employment status:
Taxpayers with an employer: expect a smaller paycheck
Kansas tax rates increase retroactively to January of 2017 and increase again in 2018. Taxpayers who have an employer and wages reported on a W-2 may notice a smaller paycheck starting in July. Their employer will use new withholding tables from the Kansas Department of Revenue. To make up for the retroactive change, the new tables are based on the 2018, rather than 2017 tax rates. These taxpayers shouldn’t have to take any action to prevent a shortfall and unexpected state tax bill in April because withholding for the rest of the year should cover their liability for the entire year.
“Because 2018 rates are being used in 2017, most taxpayers should expect Kansas withholding to be about the same in January 2018,” said Perlman. “After that, tax rates will remain the same with the highest rate at 5.7 percent.”
Taxpayers with a small business: make estimated payments or adjust spouse’s withholding
Taxpayers who pay their business tax on their individual returns, like a Schedule C, E or F, will face the largest tax increase. To deal with this gradually instead of all at once during next tax season, taxpayers will need to either make estimated payments to Kansas or adjust their spouse’s withholding to cover their joint tax liability.
The remaining estimated payments for calendar year 2017 are due in September and January and can be paid by mail, online or by phone.
“Married taxpayers filing jointly could have another option if one spouse has a Kansas employer. They could choose to cover their additional taxes owed on business income by adjusting the Kansas withholdings on that spouse’s paycheck,” said Perlman.
The K-4, filed with an employer, determines how much Kansas income tax is withheld from every paycheck. Depending on the number of allowances a taxpayer selects, their marital status, and any additional withholding requested, more KS tax will be withheld from each paycheck.
Form K-4 instructions can help taxpayers figure out how best to adjust their K-4 to cover their Kansas joint tax liability from an employer and from small business or self-employment.
More good news: restored tax deductions and credit
“Penalty and interest waivers for underpayment aren’t the only piece of good news,” added Perlman. “The new tax legislation restores certain itemized deductions, a dependent care credit and business-related deductions to offset business income that were removed in 2013. Especially because of the higher tax rates, taxpayers need to think about taking advantage of these restored tax benefits, some of which go into effect immediately, to minimize their liability.”
The results of H&R Block’s W-4 survey show consumers not only haven’t updated their withholding after tax reform, but many don’t even know how.