Background Briefing on Kansas Itemized Deductions

The Kansas Association of REALTORS® (KAR) strongly supports legislation which would allow Kansas income tax filers to take advantage of Kansas itemized deductions regardless of whether they itemize or take the standard deduction on their federal filing.  If the Legislature does nothing, the result is a hidden income tax increase on middle-class homeowners, the year after a significant income tax increase on all Kansans.

REALTORS® believe that the private ownership of real property is the foundation of our nation’s free enterprise system.  Homeownership is the cornerstone of the American Dream and deserves a preferred place in our system of values as it contributes to community responsibility; business, civic, and economic stability; family security and quality of life.  We believe every family deserves a decent home and a suitable living environment and our members are committed to helping every single citizen, who so desires, to realize the American Dream of homeownership.  Furthermore, homeownership rivals any other vehicle of wealth creation for citizens regardless of starting means.

It is because of these beliefs that REALTORS® strongly support policies that prioritize private property ownership.  As such, private property ownership, specifically homeownership, deserves a preferred place in our Kansas tax policy.

Under current Kansas law, Kansas income tax filers may only itemize deductions on state tax filings if they itemize on their federal return. Due to the doubling of the federal standard deduction, very few Kansas taxpayers will benefit from the itemized deductions historically provided in Kansas tax law. Legislation currently before the Kansas Legislature would provide that starting in tax year 2018 and thereafter, an individual may itemize deductions in Kansas tax filings regardless of whether or not an individual’s federal return allows itemized deductions.

A History of Strong Legislative Intent to Provide This Meaningful Tax Relief

In 2012, as part of the early tax packages that were recommended by the administration at the time, the Kansas itemized deductions were slated for full repeal.  Kansas REALTORS® strongly objected and the Legislature responded by preserving the mortgage interest, property tax and charitable deductions.

During the 2013 legislative session, the Kansas Legislature enacted HB 2059, which made number of significant changes to Kansas itemized deductions. Of these changes were systematic reductions, or “haircuts”, to these historic deductions. Under 2013 HB 2059, mortgage interest (MID) and property tax (PTD) deductibility were as follows: 100% in tax year 2012, 70% in tax year 2013, 65% in tax year 2014, 60% in tax year 2015, 55% in tax year 2016, 50% in tax year 2017 and 50% in tax year 2018. The intent was that as individual income tax rates stepped down, the MID and PTD would as well. This was a hard fought alternative to immediate loss of these important deductions.   Tax legislation passed in 2015 accelerated the haircuts to 50% starting in tax year 2015, where both deductions currently stand for tax years 2017 and 2018.

However, during the 2017 legislative session, KAR sought restoration of the PTD and MID.  This was based upon KAR’s growing concern that many of the tax proposals circulating at the time increased individual rates but failed to restore, even partially, either of these critical deductions. Adding to this concern was the increasing burden that additional school funding may have on property owners through either increases in mill levies or the constant upward pressure on valuations.  This is a concern that remains today.

Recognizing the State’s need for additional revenue, KAR accepted a delay in restoration.  The Legislature responded in passing legislation that put both deductions, along with the medical deduction, on a path to full restoration by 2020.

Federal Tax Reform of 2017 – Unintended Tax Increase on Middle Class Homeowners

On December 22, 2017, President Trump Signed the “Tax Cuts and Jobs Act”.  As it relates to Kansas itemized deductions, federal reform modified the MID by putting a limit on deductible mortgage debt at a $750,000 cap.  Furthermore, the state and local tax itemized deduction, which included property taxes paid on real property, was capped at $10,000.  Due to home prices as they relate to mortgage financing and valuations for property taxes, a majority of Kansas homeowners will not see an impact from these limitations as would other coastal states with high home prices and high state and local taxes.

However, the provision affecting Kansas homeowners and their ability to deduct mortgage interest and property taxes from their Kansas income tax is the federal provision increasing the standard deduction to $12,000 for single filers and $24,000 for joint returns.  According to the National Association of REALTORS®, by doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.

Based upon IRS data from 2015, nearly 250,000 Kansans took the MID and over 300,000 claimed the PTD. Of the 729,000 owner occupied houses in 2016, 60% had a mortgage. Of those that took the MID, PTD, and Charitable deductions in tax year 2015, roughly half of the filers had adjusted gross incomes of less than $100,000.  It is likely that it will be this segment of taxpayers that will no longer qualify for current state itemization because they fall short in federal itemized deductions.  It is important that middle class Kansas homeowners continue to be able to claim these deductions regardless of whether they are in a position to itemize federally.

Legislation Needed to Avoid a Hidden Income Tax Increase on Homeowners

Economic growth depends on a stable investment environment with a consistent tax code.  Since 2012, the Kansas Legislature has passed a series of alterations to Kansas tax policy followed by a repeal of many of those measures in 2017.  Throughout the turmoil, Kansas lawmakers have preserved the ability of Kansans to claim the mortgage interest and property tax deductions on state income tax returns.  As mentioned, in 2017, the Kansas Legislature put both of these deductions on a path to full restoration.

Failure to act now would result in a significant number of Kansans losing these tax benefits while invalidating years of legislative intent that these deductions be available and preserved in Kansas tax law.  The mortgage interest deduction and property tax deduction are favorable tax policies for Kansas homeowners. These deductions not only make homeownership more affordable, they recognize the critical importance of the housing industry to the Kansas economy.

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