During the recent veto session, the Kansas Department of Revenue advised the Legislature that they are interpreting KSA 79-32,111 (statute allowing credit for taxes paid to other states) to follow the ruling in the Wynne case in which the Supreme Court determined that Maryland must allow a credit for income or earnings taxes paid to any political subdivision. A political subdivision was determined to be any state, city, county or school district. Therefore, Kansas residents will be allowed a credit for taxes paid to any other state, city (for example the Kansas City, MO earnings tax), county or school district.
The credit for taxes paid to other political subdivisions which is allowed by Kansas is the lesser of the actual taxes paid to the other political subdivision or the Kansas tax on the income subject to tax by the other political subdivision. Depending on the tax rate of the other taxing agency, some Kansas residents may have already received the maximum credit allowed.
In order to claim a refund, taxpayers need to file an amended Kansas tax return within the statute of limitations to claim a credit for taxes paid to any city, county or school district. Only taxpayers that file amended returns within the 3-year statute of limitations will be eligible for a refund. Taxpayers will need to submit a copy of the tax form filed with the city, county, or school district showing the tax paid to that entity with the amended return.
Most of the returns eligible to claim this credit for Kansas taxpayers are going to be from the Kansas City, MO tax. The city has separate forms to file based on whether the income is from wages or the profits from a business. The RD-109 is for wages, and the RD-108 is for profits.
Kansas statute 79-32,111 provides that the credit only pertains to tax paid to another state on income that is included in Kansas Adjusted Gross Income for tax years 2013 and after. Therefore, Kansas City earnings tax on profit income for tax years 2013 and after reported on Federal Schedules C, E or F eligible for the non-wage business income subtraction modification would not qualify for the credit. As a result, for tax years 2013 and 2014, the only credit allowed is from wages on form RD-109.
For tax years 2012 and 2011, credit from both wages and profits would be allowed since both types of income were taxed in Kansas. Please note, however, that only 2011 returns that are still within the 3-year statute of limitations are eligible for filing amended returns which means that, at this point, the original return would have had to been filed under an extension.
Below is a list of cities, counties and school districts that levy an earnings tax
Fourteen states and the District of Columbia allow cities, counties, and municipalities to levy their own separate individual income taxes in addition to state income taxes. This list is not meant to be all inclusive.
Alabama: Birmingham levies an income tax of 1%.
Arkansas: Seven Arkansas school districts assess an income tax surcharge equal to 10% of state income tax before tax credits. They are: Berryville, Green Forest, Westside, Hope, Huntsville, Waldron and Marshall.
Colorado: Three cities impose flat taxes on compensation. Aurora charges $2 per month on compensation over $250; Denver charges $5.75 per month on compensation over $500; and Greenwood Village charges $4 per month on compensation over $250.
District of Columbia: D.C. has a bracketed income tax system. The rates are 4% for the first $10,000 of income, 6% for $10,000 to $40,000 of income, and 8.5% for income over $40,000.
Delaware: Wilmington has a flat 1.25% tax on income.
Iowa: 666 school districts impose an income tax surcharge ranging from 1% to 20% of state income tax owed.
Indiana: All 92 counties in Indiana have an individual income tax. Tax rates are in the process of being changed, and will be announced on the Indiana Department of Revenue’s website once they are finalized.
Kentucky: Eight cities in Kentucky levy income taxes on residents and non-residents. They are: Bowling Green (1.85%), Covington (2.5%), Florence (2%), Lexington-Fayette (2.25%), Louisville (2.20% for residents and 1.45% for non-residents), Owensboro (1.33%), Paducah (2%), and Richmond
(2%). Lexington-Fayette Urban County Government and Louisville-Jefferson County also impose taxes on businesses.
Maryland: All 24 Maryland counties levy income taxes on residents and non-residents. Tax rates range from 1.25% to 3.20%. Baltimore also has an income tax of 3.05%.
Michigan: Several Michigan cities impose income taxes with rates ranging from 0.50% to 2.40%.
Missouri: Both Kansas City and St. Louis have an income tax of 1%.
New York: Yonkers and New York City both have individual income taxes. New York City’s income tax rates range from 2.907% to 3.648%. Yonkers’ income tax rate is equal to 10% of your net (after credits) state income tax.
Ohio: 235 cities and 331 villages in Ohio have an income tax, including Columbus, Toledo, Cincinnati, and Cleveland. Ohio law requires a flat rate that cannot exceed 1%, unless it is approved by the voters. Ohio local income tax rates range from 0.40% in Indian Hill to 3% in Parma Heights.
Oregon: The Tri-Met Transit District (includes Portland) assesses an income tax of 0.6318% and the Lane County Transit District (includes Eugene) assesses an income tax of 0.60%. Multnomah County (Portland) also assesses a 1.45% business income tax.
Pennsylvania: Most municipalities in Pennsylvania assess a tax on wages, known as the Earned Income Tax. This tax is usually split between the municipality and the local school district. The local Earned Income Tax is only assessed on earned income, like wages. Unearned income like interest and dividends are not taxed. Pennsylvania state law limits the Earned Income Tax to a maximum flat rate of 2%, but Home Rule cities like Philadelphia and Scranton are not subject to this maximum. Cities with tax rates above 2% include: Philadelphia (3.98%), Pittsburgh (3%), Reading (2.70%), Scranton (3.40%), and Wilkes-Barre (2.85%). Non-residents have to pay the Earned Income Tax as well, but are usually taxed at a lower rate. You can look up local tax rates on Pennsylvania State’s website. Local income taxes are also assessed on the net profits of businesses.
We are currently in the process of reviewing our clients to determine the impact of this ruling on each individual tax situation and will be following up with those that will benefit from filing a refund claim. Please feel free to contact your MarksNelson advisor at (816) 743-7700 if you would like to discuss your individual circumstances or have any questions.