2014 will see a major change in the itemized deductions for Kansas income tax returns and the increase in the “haircut” on most itemized deductions. On 2013 tax returns, Kansas had a 70% limit on most of the itemized deduction that flowed from the taxpayers’ federal return. For 2014, the “haircut” has been increased to 35% which means taxpayers will only get 65% of most deductions. The Kansas deduction for gambling losses has been tossed completely beginning January 2014. (Please note this only applies on Kansas tax returns. Gambling losses are still a federal itemized deduction.)
Tax basics: the Federal tax code allows taxpayers the option of taking a standard deduction based on their filing status or Itemized Deductions shown on the Schedule A. Deductions included out of pocket medical expenses, state and local income or sales tax, real estate taxes, mortgage interest, casualty losses, gambling losses, employee business expenses and some others. The taxpayers can then decide which deduction, standard or itemized, worked best for them (usually the higher deduction.) A taxpayer can deduct gambling losses only up to their gambling winnings reported as other income on the Form 1040.
Traditionally, before 2013 tax returns, the Kansas itemized deductions were brought over from the federal return. The only change made was to subtract the deduction for state and local income taxes. Beginning with 2013 tax returns the Kansas itemized deduction became much more complicated. The state and local taxes are still not allowed and everything else but the charitable deduction was limited to 70% of the federal deductions. Once the “haircut” was calculated, the charitable deduction was added back to give the taxpayer the Kansas itemized deductions. For example, you have $10,000 in itemized deductions on you federal return. For Kansas, we would have to subtract your $1,000 in state and local taxes and $2,500 in charitable deductions. The remaining $6,500 would be subject to the 30% “haircut” and you would be left with $4,550 in general deductions. Your charitable deductions would be added back to the remaining deductions for a Kansas itemized deduction of $7,050. For 2014 the “haircut’ is 35% so you would have $4,225 in deductions before your charitable deductions are added back for a 2014 total of $6,725 Kansas itemized deductions.
The procedure outlined above works for 2014 unless you had gambling losses included on your federal Schedule A. Kansas no longer allows any deduction for gambling losses. Assuming that a $1,200 gambling loss is part of the $6,500 you had left after your state and local income taxes and charitable deductions are subtracted from the Schedule A total, you would have $5,300 (6500-1200) subject to the 35% “haircut”. That reduction would leave you with $3,445 in deductions (5300 * 65%) before your charity is added back for a total $5,945 in Kansas itemized deductions. In 2012, $10,000 in federal itemized deductions would have gotten you $9,000 in Kansas deduction. But in 2014, you only get $5945. That’s $3,055 more being taxed.
Once you’ve done the calculations, you still need to compare the remaining itemized deduction to the Kansas standard deduction and use which is higher. The “haircut” will increase until 2017 and after which only 50% of all allowed, non-charitable deductions, will be deductible. Considering the current Kansas budget shortfalls, don’t look for gambling losses to come back anytime soon.