Our Taxing Times

Refund Info

Your return is finished and e-filed it now you have to wait for your refund. If you used a tax preparer, they should have given you a idea when the refund will be deposited or check mailed. But what if it’s late? Or, you want to check on your state refund? Or, the anticipation is getting to you. You can check on the status of your refund a couple of ways.

The IRS has an application called "Where's My Refund?" on their website.  You will get a scary warning box that is new this year but just click “OK” and you can enter your information. Grab your tax return because you’ll need some info from it. You'll need the primary SSN on the return (that’s the first one), the filing status (single, married filing joint...), and the amount of refund shown on the return. You’ll get a message telling you the status of your refund that includes the target release date (if set) and the amount to expect. This is useful if some of your refund is being taken for an offset. It won’t give you all the details of why your refund is cut but you will get a number to call. But don’t call too soon after the return has been filed because the IRS needs time to get your return in the system. They request 72 hours. If the Internet isn't an option, you can get the same info through the automated refund line; 1-800-829-1954. Tax Topic 152.

Many states have ways to check on you refund. Some have online options and/or phone service. Check the website for your state tax department for what services they offer and what information you'll need. Kansas has both an online application and a phone system (1/800/894-0318) and you can check both your income tax refund and your Homestead refund.

 

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Debt Offset

You were supposed to get a refund, Federal or state, and instead you receive a letter saying that your refund was being taken to pay a debt you owe. What’s going on and what can you do about it.

The IRS will offset (take) your federal refund for back child support and a federal debt. Generally those debts are back federal taxes and being in default on a student, VA or HUD loan. The operative work is default. The letter you receive telling you about the lost refund will tell you where the money is going. The first question is if you really do owe the money. It could be payments haven’t been credited to your account yet. If you disagree with the IRS about a tax debt, call them. Other debts are handled by Financial Management and you’ll have to talk to them. (800-304-3107)  

If you do owe the money, the next question is how you are filing? If you are using any filing status but Married Filing Joint, congratulations you just paid down your debt. If you file Married Filing Joint, whose debt is it? If the debt belongs to both, like prior year taxes not being paid, you paid down your debt. But if the debt just belongs to one spouse, there might be a little relief using Form 8379, Injured Spouse Claim. The injured spouse, the one without the debt, might be able to get their part of the refund by filing this form. It asks that the taxpayers allocate income and deductions to each spouse and submit the form. The form can be sent with the return if you know you will have a problem or as a response to the letter you receive. The form only allocates it doesn’t calculate any refund. The IRS will do that based on the info on the form and if the state is community property or not.

The states will also take state tax refunds for debts. Taxes and child support are the most common but each state has their own list of debts. Kansas will collect for municipal debts like hospital, ambulance, and utilities. Also states are beginning to collect back taxes for each other. As with a federal offset, it may be possible to do an equivalent of injured spouse on a state debt once you are notified about the lost refund. BTW,  states are starting to collect for each other.

It’s disappointing to lose money you were counting on for other things. On the other hand, you are paying down your debt. And once the debt is satisfied, you’ll get a refund again.

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Special Kansas Refund Programs

Kansas has a few special credits/programs that many taxpayers don’t know about. The Food Sales Tax Refund, Homestead Refund and Property Tax Relief for Seniors (PTR) start with the same basic requirements and then each program tweaks them a little.

It’s not surprising that the requirements start the same since the Food Sales Tax refund (FST) and Homestead were once both on the Homestead return and the PTR is an offshoot of the Homestead refund.  To qualify for these programs, the taxpayer must be a Kansas resident and

• Be aged 55 or old for the whole year or
• Be disabled or blinded for the whole year, or
• Have a dependent under the age of 18 for the whole year.

The Food Sales Tax refund is a rebate on the sales tax a household pays on groceries during the year. The income thresholds are based on the total household income for the year and do include retirement distributions which are not subject to Ks tax. But, it does not include Social Security benefits. If the qualifying income is less than $17,701, the taxpayer can receive $91 for each exemption claimed on the return. With income between $17,701 and $35, 401, the credit drops to $46 an exemption. This is a refundable credit that is now claimed on the KS-40 (regular tax return)

The Homestead is claimed on the KS-40H. It’s a rebate on property tax that is paid directly because the taxpayer owns the property or they pay indirectly through rent. The amount of the refund depends on the amount of tax and the household income. The Household income for the Homestead refund is computed differently than for the FST refund. In this case, half of the social security and the prior year’s Earned Income Credit have to be included. While income such as food stamps and SSI/Disability for dependents does not figure into the household income for the credit it should be listed on the return. The household income translates into a refund percentage. It is this percentage of the property tax the taxpayer paid (max. $700) that becomes the Homestead refund. 

The Property Tax Relief Refund (KS-40PT) is fairly new and it was changed this year. It is along the lines of the Homestead. However, the taxpayer must be 65 or older (no alternatives for this one) and have income of less than $17,770 for the year. In this case, that includes all of their Social Security. The program is also only for property owners. But if they qualify, the taxpayer will get a refund of 75% of the property tax they paid for the year. The PTR refund can’t be take if the Homestead is filed. You get one or the other but not both.

Please check with your tax pro about your specific situations. But if you qualify, these programs can be a great financial help. But with the Homestead and PRT, allow some time for processing. The Kansas Department of Revenue reserves the right to check these returns and processing can take 8 weeks for owners and 20 weeks for renters.

 

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Kansas Tax Reform Proposal

Gov. Sam Brownback’s State of the State Address last night proposed some changes to Kansas’s income tax system. His plan proposes to reduce tax rates and eliminate most deductions and credits for individuals. Business taxes could also be eliminated. The tax cuts would be paid for by reducing spending, cutting tax deductions and credits, and keeping a 0.6% sales tax which is set to expire in 18 months.

Currently Kansas has 3 tax rates. For non-married taxpayers, the rates are 3.5%, 6.25% and 6.45% with the higher rates beginning at $15,000 and $30,000 respectively.  Taxpayers filing Married Filing Joint currently don’t see a rate jump until $30,000 when their rate goes to 6.25%. Their tax rate won’t increase to 6.45% until $60,000. Under the Governor’s plan, there would only be two rates. It would reduce the lower rate to 3% and the higher rate to 4.9% with the rate breaks being at $15,000 for non-married filing jointly taxpayers and $30,000 for MFJ households.

Along with the tax rate cuts, the Governor is proposing the elimination of most tax credits and deductions. On the chopping block are the mortgage interest deduction, earned income credit (currently 18% of the Federal credit), day care credit and adoption credit.

The other change proposed is doubling the standard deduction for Head of Household taxpayers to $9,000. Since I see no mention about increasing the Married Filing Joint standard deduction too, Head of Household filing status would have a higher deduction than Married in Kansas.

I have some of questions about the plan. I’d like to see a full list of what deductions and credits the Governor is looking to cut. And is he going to try to end the Food Sales Tax refund and Homestead program and knew better than to mention them in his speech?

I’m not impressed. A married couple with 2 child and $30,000 in income would have a KS tax liability of $501 this year. This would be countered by Earned Income Credit of $607 and Food Sales Tax Refund of $184. Assuming no KS withholding, they would get a $290 refund. But under the Governor’s plan, their tax liability would go down to $429 (a savings of $72). But with the loss of Earned Income Credit, the tax payer would owe the state $245 if the Food Sales Tax refund was still available. The same couple with $75,000 in wages would have a tax savings of $544 if they didn’t have any credits to lose. But these are taxpayers who would be more likely to have a mortgage interest deduction. Losing that deduction would reduce their tax savings.

We still need more info, but this plan looks like it’s going to hurt the working poor to save some taxpayers a few dollars in tax.

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States Collecting for Other States

Remember all the discussion last year about the debt indicator? That was when the IRS announced that it would not be sharing with anyone if the taxpayer’s refund would be taken for back Federal taxes, child support or default on a Federal obligation. Well, the states too will take state tax refunds. Besides back state taxes and child support, Kansas will take for hospital bills and even utility bills. The debt has to come from a city, state or county owned entity. And Kansas has a variation of the Federal Injured Spouse they send out when want to take a refund.

Kansas also has a reciprocal agreement with Missouri to help collect each other’s debts. The states are working out these agreements to help collect revenue. A Taxpayer who owes Kansas for back taxes moves to Missouri. On their Missouri state return, they have a refund coming but due to the reciprocal agreement, Missouri can take that refund and send it to Kansas.

This is a growing trend as states are working together to collect for each other. So, if you owe back state taxes, child support or certain other debts, don’t expect moving will help you avoid paying your debts.

No Ks Tax Credits With ITIN

At school this week, I picked up more info on a change in Kansas Individual returns for 2011 (KS-40). I mentioned it in a September post but I now have more background info for it.

As most other states, Kansas is working within budget issues. In order to ensure that those receiving state credits such as the Earned Income Credit, Child Care Credit, and Food Sales Tax Refund are qualified, the KDOR is now requiring the name, SSN and date of birth for all dependents on the return on the KS-40. Taking it one step further, if the dependent or taxpayer doesn’t have a SSA but uses an ITIN (Individual Tax Identification Number) the return will not qualify for any of the special credits mentioned above. That person can still qualify for an exemption but at the cost of all credits. The example Terry Hunt of the KDOR used at the workshop concerned a family who qualified on their 2010 return for Kansas EITC and Food Sales Tax Refund (FSTR). In 2011, the taxpayer’s father moves in with the family. Because he has an ITIN, the family will lose those credits on the 2011 return. This change could have a big economic impact since there were 14, 976 returns filed for 2010 in Kansas with ITINs used by the taxpayer or spouse. The new rules will expand the ITIN returns. Kansas EITC is 18% of the federal credit. The Food Sales Tax Refund was either $90 or $45 depending on income. My estimated average KS EITC on 2010 return was $344. Just for reference, if all the 2010 ITIN returns had qualified for EITC at my average, the EITC for those returns would have $5,151,744. That doesn’t even consider the FSTR or any new ITIN returns. This could create a considerable savings to the state.

This idea does bring up a question. Kansas has always been tied to the dependents claimed on the taxpayer’s Federal return. Can a dependent be claimed on the Federal return and not on Kansas? I doubt it, but that will mean letters from KDOR in a few years when the IRS / State matching program kicks in.

Kansas Changes

Things I learned in school last week (more to come).

The Kansas Department of Revenue has announced changes to the KS-40 tax return. The forms for tax year 2011 have been expanded and will now require the name, SSN and date of birth for all the dependents claimed on the return.

The Safe Senior program has been expanded. This is the alternative to the Kansas Homestead return for taxpayers 65 or above with income less than $17,700 (includes all Social Security). Qualifying taxpayers will get a rebate of 75% of their actual and timely paid tax on their principle place of residence. This is an increase from 45% in previous years.

Taxing Social Security

Summer seems to be the tax planning time around the office. Generally a client mentions retirement or starting to draw Social Security when I prepare their taxes and I suggest getting together to do some planning. I have seen too many times when the client gets a nasty surprise the 1^st time they do “retirement” taxes. The big culprit is usually Social Security taxability. It’s not something SSA mentions when a taxpayer starts drawing their Social Security. And, surprisingly, it’s not something “friends” warn them about either.

Social Security can be taxable. It depends of the income on the return. Basically, if half of the Social Security received and all the rest of the income on the return is less than $32,000 for a couple filing jointly, $25,000 for everyone else (one exception), then the Social Security is not taxable. Above that, taxability phases in up to a maximum of 85% taxability. Since this is the tax code we’re talking about, the actual calculations are not as simple as it sounds. There is some excluded income that has to be added into the calculation. And if the taxpayer is filing Married Filing Separate but lived even one day with their spouse, they go to 85% taxability and skip the phase in. You get the picture.

There are two special problems with taxability of Social Security benefits. The first is that they can be taxed on more than was actually received. The taxable amount is figured on the total amount credited to the taxpayer and that includes attorney fees and Workman’s’ Comp pay back. I have also seen where gambling winnings have triggered taxable Social Security. While the client may have losses to offset gambling income, they are still stuck paying taxes on the Social Security. Also, if you receive a lump sum that includes back years benefits, there are some special calculations that might reduce the taxability. Please talk to your tax preparer. My big problem with taxing Social Security is there has been no adjustment for inflation. When I started preparing taxes in 1988, I seldom saw taxable Social Security. Benefits were much lower and few retirees worked or had large pensions to trigger taxability. Now, it is rare to not have taxable Social Security. I’d like to see the thresholds tied to inflation but with the deficit and other tax issues, I don’t see this happening.

If it looks as if you will have taxable Social Security, you might want to set up withholding from SSA, up the withholding from another source or make estimate payments to keep from an underpayment of estimated tax penalty. Yes, you can have Social Security withhold for Federal. It’s a set percentage; 7%, 10% or 15%, your choice. It many not cover all the tax but it’s a start.

The good news is that many states don’t tax Social Security benefits. In Kansas, if the Federal Adjusted Gross Income is less than $75,000, the taxable Social Security is subtracted from the Federal income. Unfortunately, if the income is above $75,000, there is no deduction. Oklahoma, however, allows taxpayers to deduct all the taxable Social Security no matter how much income is involved. Check with your state for their policy.

Retirement should be a time of relaxation and not stress about taxes. The best idea is to check with your tax professional about what you can do to protect yourself from tax surprises. And make sure that they are taking taxable Social Security into consideration. If they aren’t, maybe it’s time to look for someone new.

State Tax Simplifcation

I’m on the AICPA’s (American Institute of CPSs) press release email list and occasionally something they send out interests me and it ends up here. (I’m sure that is why I’m on their list.) I just received a press release about their Congressional testimony at a hearing about a new tax law that may change how a non-resident’s income is taxed by the non-resident state where she is working.

The legislation is H.R. 1864, the “Mobile Workforce State Income Tax Simplification Act of 2011.” Its primary sponsor is Rep. Howard Coble (NC). The bill would give taxpayers 30 days of employment in a non-resident state before they would be responsible for state tax and withholding.The bill itself is short and as much of my understanding comes from the AICPA testimony and examples as from the bill. 

My understanding is that this will not apply to all non-resident employees. I have a few clients each year who live in Kansas but take a job at an Oklahoma casino. They work for a while then quit and move on to the next job. Even if they don’t work for 30 days, I don’t think see bill applying to them. I think it would apply to businesses that send work crews to short term assignments in states other than their home state. For example, a Kansas roofing business that takes jobs in Oklahoma. If an employee work for less than 30 days in OK, they would be covered by this bill. If the employee works 31 days, their OK taxable income begins and withholding starts. Everyone gets 30 days free. This would affect not just the construction business but also firms doing on site visited for inspections and audits. And don’t forget the athletes and performers who may only physically be in a state for a couple of days but still have to file a return for the income earned. The idea is to reduce the paperwork burden for small businesses that have a de minimis presence in non-resident state.

Sounds kinda good, but I want some clarification. First, am I right and this legislation doesn’t apply to my client working in the casino? What about the sole proprietor that takes jobs in more than their home state? It sounds like they might be covered if they are doing all the work, but I would want to make sure since I have a couple in that boat. Also, how will this other business entities like partnerships and S-Corps?

I don’t think passage of this bill is a slam dunk. I’m sure that the States will fight it. It would be bad enough to lose the taxes from Joe the roofer but losing the tax on the high salaries some athletes and performers earn would really hurt them. Also, the business owner now has to deal with 2 sets of rules and who qualifies for which.

But, it’s an interesting idea and I will keep an eye on H.R. 1864.

RAL for KS Homestead?

Congress is not the only legislative branch that can write a law that will take a good idea and turn it into a confusing mess.  Kansas has a program, Homestead Refund, which provides eligible taxpayers a rebate on their property tax they paid directly because they own or indirectly through rent. To qualify, you have to be, for the whole year, over 55, have a dependent child or be permanently disabled. You also have to meet income guidelines. This changes each year but for 2010 returns the max was $30,800 (only half of your SS counts). It’s a great program and I have a lot of seniors and single parents who qualify. However, I will be discouraging them from taking advantage of one of the payment options. The Refund Advancement Program rivals the Making Work Pay Credit for dumbness. The only good thing is that fewer people are affected by this mess.

When my Grandmother was alive, she would go to the county treasurer’s office when she received her property tax bill in Nov/Dec. They would estimate how much Homestead she would receive and apply part of that to her first tax payment. When I filed her actual Homestead return, the state would subtract what she was advanced and mail her a check for the difference. No problem then. Now taxpayers have an option on their Homestead Return to have their refund applied to their next bill. At least, that’s what I thought was happening. Actually, it turns out that’s what a lot of people thought was happening

 Here’s what I thought the procedure was. In early 2010, the taxpayer files their Homestead return and qualifies for $500 in a Homestead refund. They can opt to get the refund now as a check or direct deposit into their own account. They can spend it as they choose. In fact, when they get their tax bill in December, the taxpayer can used the refund they saved in their own account to pay their taxes. But Kansas has another option. The taxpayer can mark a box to participate in The Refund Advancement Program. It sounds like the taxpayer’s refund is being sent to the county as a prepayment of their taxes. Then in December the county uses the refund as a partial payment of their property taxes. Sounds great. It’s logical and efficient. Pre-pay so you won’t spend it. Withholding for your property taxes. But that’s not what is happening. Think a RAL (refund anticipation loan) with no interest based on last year’s refund.

They’re using a variation of the program my Grandmother used. The county reduces your tax bill by the Homestead Refund you qualified for earlier in the year. Then you re-pay the advance with your next year’s (2011 in this example) Homestead Refund. If the 2011 Homestead is less than the prior year, the taxpayer pays back the difference. If it’s higher, they get the extra refunded to them. Next Nov/Dec their property tax should be reduced by what their Homestead refund was back in the spring. That’s the big difference that most people don’t understand. Unlike today’s program, Grandma’s program only credited her with a percentage of the projected Homestead. The taxpayer was less likely to get caught up in the repayment/refund trap the new program has.

Sorry KDOR, this is one program I will try to discourage my clients from taking. Now if you could convince the Legislature to carry forward a Homestead refund to the same year’s tax that would be a program I could get behind.