Session of 1998
                   
HOUSE BILL No. 2756
         
By Committee on Appropriations
         
1-30
            9             AN ACT relating to income taxation; establishing education savings ac-
10             count contribution deductions; amending K.S.A. 79-32,117 and 79-
11             32,117h and repealing the existing sections.
12            
13       Be it enacted by the Legislature of the State of Kansas:
14           Section 1. K.S.A. 79-32,117 is hereby amended to read as follows:
15       79-32,117. (a) The Kansas adjusted gross income of an individual means
16       such individual's federal adjusted gross income for the taxable year, with
17       the modifications specified in this section.
18           (b) There shall be added to federal adjusted gross income:
19           (i) Interest income less any related expenses directly incurred in the
20       purchase of state or political subdivision obligations, to the extent that
21       the same is not included in federal adjusted gross income, on obligations
22       of any state or political subdivision thereof, but to the extent that interest
23       income on obligations of this state or a political subdivision thereof issued
24       prior to January 1, 1988, is specifically exempt from income tax under the
25       laws of this state authorizing the issuance of such obligations, it shall be
26       excluded from computation of Kansas adjusted gross income whether or
27       not included in federal adjusted gross income. Interest income on obli-
28       gations of this state or a political subdivision thereof issued after Decem-
29       ber 31, 1987, shall be excluded from computation of Kansas adjusted
30       gross income whether or not included in federal adjusted gross income.
31           (ii) Taxes on or measured by income or fees or payments in lieu of
32       income taxes imposed by this state or any other taxing jurisdiction to the
33       extent deductible in determining federal adjusted gross income and not
34       credited against federal income tax. This paragraph shall not apply to taxes
35       imposed under the provisions of K.S.A. 79-1107 or 79-1108, and amend-
36       ments thereto, for privilege tax year 1995, and all such years thereafter.
37           (iii) The federal net operating loss deduction.
38           (iv) Federal income tax refunds received by the taxpayer if the de-
39       duction of the taxes being refunded resulted in a tax benefit for Kansas
40       income tax purposes during a prior taxable year. Such refunds shall be
41       included in income in the year actually received regardless of the method
42       of accounting used by the taxpayer. For purposes hereof, a tax benefit
43       shall be deemed to have resulted if the amount of the tax had been de-

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  1       ducted in determining income subject to a Kansas income tax for a prior
  2       year regardless of the rate of taxation applied in such prior year to the
  3       Kansas taxable income, but only that portion of the refund shall be in-
  4       cluded as bears the same proportion to the total refund received as the
  5       federal taxes deducted in the year to which such refund is attributable
  6       bears to the total federal income taxes paid for such year. For purposes
  7       of the foregoing sentence, federal taxes shall be considered to have been
  8       deducted only to the extent such deduction does not reduce Kansas tax-
  9       able income below zero.
10           (v) The amount of any depreciation deduction or business expense
11       deduction claimed on the taxpayer's federal income tax return for any
12       capital expenditure in making any building or facility accessible to the
13       handicapped, for which expenditure the taxpayer claimed the credit al-
14       lowed by K.S.A. 79-32,177, and amendments thereto.
15           (vi) Any amount of designated employee contributions picked up by
16       an employer pursuant to K.S.A. 12-5005, 20-2603, 74-4919 and 74-4965,
17       and amendments to such sections.
18           (vii) The amount of any charitable contribution made to the extent
19       the same is claimed as the basis for the credit allowed pursuant to K.S.A.
20       79-32,196, and amendments thereto.
21           (c) There shall be subtracted from federal adjusted gross income:
22           (i) Interest or dividend income on obligations or securities of any
23       authority, commission or instrumentality of the United States and its pos-
24       sessions less any related expenses directly incurred in the purchase of
25       such obligations or securities, to the extent included in federal adjusted
26       gross income but exempt from state income taxes under the laws of the
27       United States.
28           (ii) Any amounts received which are included in federal adjusted
29       gross income but which are specifically exempt from Kansas income tax-
30       ation under the laws of the state of Kansas.
31           (iii) The portion of any gain or loss from the sale or other disposition
32       of property having a higher adjusted basis for Kansas income tax purposes
33       than for federal income tax purposes on the date such property was sold
34       or disposed of in a transaction in which gain or loss was recognized for
35       purposes of federal income tax that does not exceed such difference in
36       basis, but if a gain is considered a long-term capital gain for federal in-
37       come tax purposes, the modification shall be limited to that portion of
38       such gain which is included in federal adjusted gross income.
39           (iv) The amount necessary to prevent the taxation under this act of
40       any annuity or other amount of income or gain which was properly in-
41       cluded in income or gain and was taxed under the laws of this state for a
42       taxable year prior to the effective date of this act, as amended, to the
43       taxpayer, or to a decedent by reason of whose death the taxpayer acquired

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  1       the right to receive the income or gain, or to a trust or estate from which
  2       the taxpayer received the income or gain.
  3           (v) The amount of any refund or credit for overpayment of taxes on
  4       or measured by income or fees or payments in lieu of income taxes im-
  5       posed by this state, or any taxing jurisdiction, to the extent included in
  6       gross income for federal income tax purposes.
  7           (vi) Accumulation distributions received by a taxpayer as a beneficiary
  8       of a trust to the extent that the same are included in federal adjusted
  9       gross income.
10           (vii) Amounts received as annuities under the federal civil service
11       retirement system from the civil service retirement and disability fund
12       and other amounts received as retirement benefits in whatever form
13       which were earned for being employed by the federal government or for
14       service in the armed forces of the United States.
15           (viii) Amounts received by retired railroad employees as a supple-
16       mental annuity under the provisions of 45 U.S.C. 228b (a) and 228c (a)(1)
17       et seq.
18           (ix) Amounts received by retired employees of a city and by retired
19       employees of any board of such city as retirement allowances pursuant to
20       K.S.A. 13-14,106, and amendments thereto, or pursuant to any charter
21       ordinance exempting a city from the provisions of K.S.A. 13-14,106, and
22       amendments thereto.
23           (x) For taxable years beginning after December 31, 1976, the amount
24       of the federal tentative jobs tax credit disallowance under the provisions
25       of 26 U.S.C. 280 C. For taxable years ending after December 31, 1978,
26       the amount of the targeted jobs tax credit and work incentive credit dis-
27       allowances under 26 U.S.C. 280 C.
28           (xi) For taxable years beginning after December 31, 1986, dividend
29       income on stock issued by Kansas Venture Capital, Inc.
30           (xii) For taxable years beginning after December 31, 1989, amounts
31       received by retired employees of a board of public utilities as pension and
32       retirement benefits pursuant to K.S.A. 13-1246, 13-1246a and 13-1249
33       and amendments thereto.
34           (xiii) For taxable years beginning after December 31, 1993, the
35       amount of income earned on contributions deposited to an individual
36       development account under K.S.A. 79-32,117h, and amendments thereto.
37           (xiv) For all taxable years commencing after December 31, 1996, that
38       portion of any income of a bank organized under the laws of this state or
39       any other state, a national banking association organized under the laws
40       of the United States, an association organized under the savings and loan
41       code of this state or any other state, or a federal savings association or-
42       ganized under the laws of the United States, for which an election as an
43       S corporation under subchapter S of the federal internal revenue code is

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  1       in effect, which accrues to the taxpayer who is a stockholder of such
  2       corporation and which is not distributed to the stockholders as dividends
  3       of the corporation.
  4           (xv) For all taxable years commencing after December 31, 1997, the
  5       amount, not to exceed $2,000, of contributions to an education savings
  6       account pursuant to section 3.
  7           (d) There shall be added to or subtracted from federal adjusted gross
  8       income the taxpayer's share, as beneficiary of an estate or trust, of the
  9       Kansas fiduciary adjustment determined under K.S.A. 79-32,135, and
10       amendments thereto.
11           (e) The amount of modifications required to be made under this sec-
12       tion by a partner which relates to items of income, gain, loss, deduction
13       or credit of a partnership shall be determined under K.S.A. 79-32,131,
14       and amendments thereto, to the extent that such items affect federal
15       adjusted gross income of the partner.
16           Sec. 2. K.S.A. 79-32,117h is hereby amended to read as follows:
17       79-32,117h. (a) This section may be cited as the individual development
18       account act.
19           (b) For the purposes of this section:
20           (1) ``Account holder'' means the individual on whose behalf the in-
21       dividual development account is established.
22           (2) ``Dependent child'' means any person under the age of 21 years
23       or any person who is legally entitled or subject to a court order for the
24       provision of proper and necessary subsistence and education, and who is
25       not emancipated, married or a member of the armed forces of the United
26       States.
27           (3) ``Individual development account'' means a custodial account es-
28       tablished or organized to pay for K-12 education expenses of the account
29       holder.
30           (4) ``Custodian'' means a chartered state bank or trust company au-
31       thorized to act as a fiduciary, a national banking association or savings and
32       loan association authorized to act as a fiduciary, or an insurance company
33       and shall include any other qualified financial custodian as defined by
34       rules and regulations adopted by the secretary of revenue.
35           (c) (1) For taxable years beginning after December 31, 1993, a res-
36       ident of this state shall be allowed to deposit contributions to an individual
37       development account. Except as provided in subsection (c)(8), the
38       amount of deposit for the first taxable year subsequent to the effective
39       date of this act shall not exceed:
40           (A) $2,000 for the account holder; or
41           (B) $2,000 for the account holder and $1,000 for each dependent
42       child of the account holder.
43           (2) The maximum allowable amount of deposit for subsequent years

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  1       shall be increased annually by a percentage equal to the previous year's
  2       increase in the consumer price index as published annually as soon after
  3       December 31 each year as possible by the secretary of state in the Kansas
  4       register. As used in this paragraph (2), ``consumer price index'' means the
  5       twelve-month average of the consumer price index for all urban consum-
  6       ers United States city average which is published by the United States
  7       department of labor.
  8           (3) Income earned on an individual development account shall be
  9       exempt from state income taxation under the Kansas income tax act.
10           (4) Upon agreement between an employer and employee, an em-
11       ployer may contribute to the employee's individual development account,
12       subject to the restrictions in subsection (6)(A).
13           (5) The individual development account shall be established as a cus-
14       todial account and be placed with a custodian.
15           (6) Individual development account funds may be withdrawn by the
16       account holder at any time for any purpose, subject to the following re-
17       strictions and penalties:
18           (A) There shall be a distribution penalty for withdrawal of individual
19       development account funds by the account holder; such penalty shall be
20       25% of the amount of interest earned as of the date of withdrawal on the
21       account and shall be remitted by the custodian to the state and disposed
22       of in the same manner as other penalties imposed under the Kansas in-
23       come tax act; and, upon such withdrawal, the interest earned during the
24       tax year in which withdrawal occurs shall be subject to state income tax-
25       ation; and
26           (B) withdrawals shall be permitted without penalty for the purposes
27       for which the individual development account was created.
28           (7) Upon the death of the account holder, the account principal, as
29       well as any interest accumulated thereon, shall be distributed to the de-
30       cedent's estate and taxed as part of the estate.
31           (8) There shall be no limit on the amount of earned income of a
32       dependent child, who is a recipient of aid to families with dependent
33       children, deposited in an individual development account of such de-
34       pendent child that was created or organized to pay for educational ex-
35       penses of such dependent child.
36           New Sec. 3. (a) This section may be cited as the education savings
37       account act.
38           (b) For the purposes of this section:
39           (1) ``Account holder'' means the individual on whose behalf the ed-
40       ucation savings account is established.
41           (2) ``Dependent child'' means any person under the age of 21 years
42       or any person who is legally entitled or subject to a court order for the
43       provision of proper and necessary subsistence and education, and who is

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  1       not emancipated, married or a member of the armed forces of the United
  2       States.
  3           (3) ``Education savings account'' means a custodial account estab-
  4       lished or organized to pay for post secondary education expenses of the
  5       account holder.
  6           (4) ``Custodian'' means a chartered state bank or trust company au-
  7       thorized to act as a fiduciary, a national banking association or savings and
  8       loan association authorized to act as a fiduciary, or an insurance company
  9       and shall include any other qualified financial custodian as defined by
10       rules and regulations adopted by the secretary of revenue.
11           (c) For taxable years beginning after December 31, 1997, a resident
12       of this state shall be allowed to deposit contributions to an education
13       savings account. Except as provided in subsection (c)(8), the amount of
14       deposit for the first taxable year subsequent to the effective date of this
15       act shall not exceed:
16           (1) $2,000 for the account holder; or
17           (2) $2,000 for the account holder and $1,000 for each dependent
18       child of the account holder.
19           (3) Income earned on an education savings account shall be exempt
20       from state income taxation under the Kansas income tax act.
21           (4) Upon agreement between an employer and employee, an em-
22       ployer may contribute to the employee's education savings account, sub-
23       ject to the restrictions in subsection (6)(A).
24           (5) The education savings account shall be established as a custodial
25       account and be placed with a custodian.
26           (6) Education savings account funds may be withdrawn by the ac-
27       count holder at any time for any purpose, subject to the following restric-
28       tions and penalties:
29           (A) There shall be a distribution penalty for withdrawal of educations
30       savings account funds by the account holder; such penalty shall be 25%
31       of the amount of interest earned as of the date of withdrawal on the
32       account and shall be remitted by the custodian to the state and disposed
33       of in the same manner as other penalties imposed under the Kansas in-
34       come tax act; and, upon such withdrawal, the interest earned during the
35       tax year in which withdrawal occurs shall be subject to state income tax-
36       ation; and
37           (B) withdrawals shall be permitted without penalty for the purposes
38       for which the education savings account was created.
39           (7) Upon the death of the account holder, the account principal, as
40       well as any interest accumulated thereon, shall be distributed to the de-
41       cedent's estate and taxed as part of the estate.
42           (8) There shall be no limit on the amount of earned income of a
43       dependent child, who is a recipient of aid to families with dependent

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  1       children, deposited in an educations savings account of such dependent
  2       child that was created or organized to pay for educational expenses of
  3       such dependent child.
  4           Sec. 4. K.S.A. 79-32,117 and 79-32,117h are hereby repealed.
  5           Sec. 5. This act shall take effect and be in force from and after its
  6       publication in the statute book.
  7      
  8