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Not all states tax Social Security and retirement benefits the same. Kansas is considered one of the least “tax-friendly” states to retirees – and both Gov. Laura Kelly and leaders in the Kansas Legislature want to change that.
Currently, Kansas fully taxes income from private retirement plans, such as IRAs and 401(k)s, and out-of-state pensions. The state also taxes Social Security income for households with adjusted gross incomes (AGI) above $75,000.
This tax treatment is not an issue for most Kansas retirees living off nothing but Social Security income. Their incomes would fall below the threshold of being taxed by the state.
But, according to IRS data, 165,000 Kansas filers over the age of 65 had incomes of $75,000 or more — representing nearly 40% of households filing tax returns.
Kelly and a bipartisan special committee on taxation in the Legislature both want to change an aspect of Kansas law referred to as “the Social Security cliff” affecting those upper-income retirees. Such a change has the potential to save filers hundreds of dollars — and potentially remove an incentive for them to leave Kansas for more retiree-friendly states.
This is particularly relevant to seniors living on the Kansas side of the Kansas City metro area. Missouri exempts filers with adjusted gross incomes up to $100,000 from paying taxes on Social Security income and also offers some exemptions for private retirement plan income.
What is Kelly’s proposal to adjust Kansas retirees’ taxes on Social Security?
Under current Kansas law, recipients of Social Security must pay state tax on all their Social Security income benefits if their adjusted gross income exceeds $75,000, even by $1. This means that a retired couple with $75,001 AGI could potentially owe $1,500 in more in state taxes than a couple earning $75,000.
“Tax cliffs like this one create fairness concerns because there is no reason two taxpayers with only one dollar difference should have such stark differences in state tax liability,” said Katherine Loughead of the Tax Foundation, a nonpartisan national tax policy nonprofit, in testimony to the special committee on taxation.
Kelly’s proposal would change the law to tax benefits incrementally — rather than for the full amount — for retirees reporting up to $100,000. Such a change was endorsed by the special committee, which convened twice late last year before issuing a report in January. That report calls for eliminating the Social Security “cliff” and considering gradual elimination of state tax on all retirement income sources, including Social Security. Social Security income was completely exempt from income taxes prior to 1983.
The Kansas Department of Revenue estimates that eliminating state income tax on all retirement income including Social Security would cost the state $400 million to $500 million in annual revenue. The governor’s more modest plan is projected to cost the state $34 million.
Understanding the Kansas Social Security “cliff”
To fully understand the impact of the existing Social Security “cliff,” some math is required.
In Kansas, the average retiree’s monthly benefit was $1,722 in 2021, according to Eric Adell, a tax policy research analyst with the Kansas Legislative Research Department. One retiree making this would receive $20,664 annually. A married couple, both making the average amount, would receive $41,328 annually.
That’s a long way from $75,000 — the threshold at which Social Security income is taxed — so why is that number important? Retirees often have more sources of income than Social Security. One or both might still work, receive additional pensions or draw down retirement savings from investments.
If all of that adds up to $75,001 they would owe taxes on all their Social Security – or about $1,500 in additional state taxes for a retired couple both receiving the average benefit.
According to Adell, in 2021 Kansas had more than 60,000 filers with Social Security income already over the $75,000 cliff. An additional 15,000 filers reported Social Security income of less than $75,000 – a group that includes more people at risk of going over the cliff.
Could Social Security COLAs push you over the cliff?
Every family’s income changes from year to year for a variety of reasons. Social Security recipients can see annual cost-of-living adjustment increases to their benefits. Due to high inflation, those adjustments increased benefits by 5.9% in 2022 and 8.7% in 2023.
So now our hypothetical average Kansas retirees who received $1,722 a month in 2021 are getting $1,982 a month in 2023. That’s an increase of more than $6,000 annually – a significant amount for retirees nearing the cliff.
“The (COLA) increase would likely raise some people over the $75,000 income threshold,” triggering the tax on their Social Security benefits, Adell said. It would be difficult to determine exactly how many Kansans might be affected by this because there are so many variables at play in their overall income picture.
Whether the governor and the Legislature find common ground on the state tax treatment of Social Security and retirement income, any changes would not take effect this year.
Get free help with taxes in Wichita
For households earning less than $60,000 annually, the United Way of the Plains offers free tax preparation help at locations across Wichita, Sedgwick, Butler, Cowley, Geary and Marion counties. Call 211 to schedule your appointment. Help is also available for Spanish speakers. The deadline to file 2022 income taxes is April 18, 2023.
There is also a drop-in event on Jan. 28 from 10 a.m. to 3 p.m. at the Brewer Community Center, 1329 E. 16th St. North, Wichita. The United Way is hosting the KICK-START 2023: Financial Resources Fair, offering tax help, as well as assistance with utility bills and bank accounts for people currently without bank services.
To take advantage of the taxpayer assistance, people are advised to bring appropriate documents. A list of these is available online.
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