Are payments from the Kansas Public Employees Retirement System (KPERS) subject to Kansas income tax, and how is the exemption claimed?
Apply this to your situation
This page answers the general question as of 2005. Ezel answers yours, under current Kansas tax law, with citations.
Plain-English summary
KPERS members contribute part of their pay to a membership account during employment, and receive payments at termination or retirement. Those payments are usually taxable federally and land in federal adjusted gross income (AGI). Kansas begins its income tax from federal AGI, so an exemption is taken as a subtraction modification under K.S.A. 79-32,117(c)(ii).
All KPERS benefits are specifically exempt from Kansas income tax under K.S.A. 74-4923(b). To qualify, a payment must be (1) received directly from KPERS and (2) included in the member's federal AGI in the year received.
- Direct one-time payments -- a withdrawal of accumulated contributions (K.S.A. 74-4917) or a partial lump sum at retirement of up to 50% of the benefit's actuarial value (K.S.A. 74-4918, 74-4964, 74-4964a) -- are exempt; subtract the amount on the Kansas return.
- Monthly payments -- maximum, joint-survivor, and life-certain retirement benefits -- are exempt; subtract them.
- Rollovers: as originally issued, the notice treated later payments from a rollover account as taxable, because rolled-over funds lose their KPERS character and are no longer paid directly by KPERS. This Revised Notice 05-04 updates that: after the 2007 Legislature amended K.S.A. 74-4923(b) (Senate Substitute for House Substitute for HB 2457), a lump-sum payment at retirement and all its earnings keep their Kansas tax-exempt status even if rolled over into a qualified account, whether segregated or commingled, for tax years beginning after December 31, 2000.
What this means for you
If you receive money directly from KPERS -- a contribution withdrawal, a partial lump sum, or a monthly pension -- and it appears in your federal AGI, subtract it on your Kansas return so Kansas does not tax it. The 2007 change is important for anyone who took a retirement lump sum and rolled it into an IRA or other qualified plan: that lump sum and its earnings stay Kansas-exempt. Ordinary payments out of a commingled rollover account that are not a retirement lump sum can still be taxable, so keep records showing what the payment was. This notice is the revised version; confirm the current statute before relying on it.
Common questions
Q: Is my KPERS pension taxed by Kansas?
A: No. All KPERS benefits are exempt under K.S.A. 74-4923(b). You claim the exemption as a subtraction modification on your Kansas return.
Q: How do I claim the exemption?
A: Subtract the KPERS amount that is in your federal adjusted gross income on the Kansas return under K.S.A. 79-32,117(c)(ii), so it is removed from Kansas taxable income.
Q: What are the two requirements for exemption?
A: The payment must be received directly from KPERS, and it must be included in your federal AGI in the year you receive it.
Q: If I rolled my retirement lump sum into an IRA, is it still exempt?
A: Yes. After the 2007 amendment to K.S.A. 74-4923(b), a lump-sum payment at retirement and its earnings keep their Kansas exemption even when rolled into a qualified account, for tax years beginning after December 31, 2000.
Citations and references
- K.S.A. 74-4923(b) -- KPERS benefits exempt from any Kansas tax (as amended in 2007 to cover rolled-over retirement lump sums).
- K.S.A. 79-32,117(c)(ii) -- subtraction for amounts in federal AGI that Kansas specifically exempts.
- K.S.A. 74-4917 (contribution withdrawals); K.S.A. 74-4918, 74-4964, 74-4964a (partial lump-sum options).
- Senate Substitute for House Substitute for HB 2457 (2007) -- amended K.S.A. 74-4923(b).
Subject
Kansas Income Tax Treatment of KPERS Payments (Revised)
Source
- Landing page: Kansas Department of Revenue Policy Information Library
- Original document: Notice 05-04
Original ruling text
Notice
Notice Number: 05-04
Tax Type: Individual Income Tax
Brief Description: Kansas Income Tax Treatment of Certain Payments from the Kansas Public
Employees Retirement System (KPERS)
Keywords:
Approval Date: 05/20/2005
Body:
KANSAS DEPARTMENT OF REVENUE
OFFICE OF POLICY AND RESEARCH
REVISED NOTICE 05-04
Kansas Income Tax Treatment of
Certain Payments From The
Kansas Public Employees Retirement System (KPERS)
This Revised Notice 05-04 replaces Notice 05-04 issued May 20, 2005. Revisions were made to recognize
changes made during the 2007 Legislative Session. The revisions affect only the section captioned “Roll-over
Payments”.
Advice has been requested concerning the income tax treatment of certain payments received from the Kansas Public
Employees Retirement Systems (KPERS).
Introduction
During the period of their employment, KPERS members are required to contribute a percentage of their gross income
to their own membership account. These contributions are credited with interest, based on the member’s date of
employment, throughout the KPERS membership period under K.A. A. 74-4919(1). Contributions plus accrued
interest are defined as “accumulated contributions” by K.S.A. 74-4902.
Upon termination of employment or upon retirement KPERS members are entitled to receive certain payments from
their KPERS membership account. As a rule these payments are taxable for federal income tax purposes. Therefore,
these payments are generally included in federal adjusted gross income.
Kansas law requires the use of federal adjusted gross income as the starting point for computing the Kansas income
tax. Certain addition or subtraction “modifications” are then made in accordance with K.S.A. 79-32,117. Subsection
(c)(ii) of K.S.A. 79-32,117 provides that “Any amounts received which are included in federal adjusted gross income
but which are specifically exempt from Kansas income taxation under the laws of the state of Kansas” are to be
subtracted from federal adjusted gross income prior to computing the Kansas income tax.
All KPERS benefits are specifically exempt from Kansas income tax. The exemption is found in K.S.A. 74-4923(b),
which states, in pertinent part:
(b) Any annuity, benefits, funds, property or rights created by, or accruing to any person under the
provisions of K.S.A. 74-4901 et seq. or 74-4951 et seq., and amendments thereto, shall be exempt from
any tax of the state of Kansas or any political subdivision or taxing body of the state; . . . . .
Questions have arisen as to how the exemption from Kansas income tax contained in K.S.A. 74-4923(b) should
be claimed with regard to payments from KPERS membership accounts and related accounts. This Notice
answers these questions with regard to payments of accumulated contributions upon termination of employment,
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monthly retirement benefits, and partial lump-sum payments. The payments are discussed in the context of the
manner in which they are received: Direct one-time payments, monthly payments, and rollover payments.
Generally
In order to qualify for exemption from Kansas income tax, payments received by a KPERS member must meet
two requirements. First, the payment must be received directly from KPERS. Second, the payment must be
included in the member’s federal adjusted gross income in the year it is received.
Payments that are not included in the member’s federal adjusted gross income in the year of receipt and
payments that are not received directly from KPERS are not exempt.
Direct One-Time Payments
KPERS members who cease covered employment have the right under K.S.A. 74-4917 to withdraw their
accumulated contributions and have this amount paid directly to them. Upon withdrawal the contributions will
be taxable for federal income tax purposes and included in federal adjusted gross income.
Similarly, retiring KPERS members have the right under K.S.A. 74-4918, 74-4964 and 74-4964a to take part of
their retirement benefit in a lump sum. This partial lump sum option means that upon retirement the member my
elect to take a single lump-sum payment equal to a given percentage (up to 50%) of the actuarial present value
of their lifetime benefit. The amount of the lump-sum payment will be included in federal adjusted gross
income.
Because these payments are received directly from KPERS and are included in the KPERS member’s federal
adjusted gross income in the year received they are exempt from Kansas income tax.
In order to claim the exemption from Kansas income tax for direct one-time payments of withdrawn
contributions or partial lump sum payments a subtraction modification should be made on the Kansas income
tax return. This modification should be an amount equal to the amount of the withdrawn accumulated
contributions or partial lump-sum payment. The effect of the modification will be to remove the accumulated
contributions or partial lump-sum payment from Kansas taxable income.
Monthly Payments
Monthly payments include the maximum monthly retirement benefit payment, joint-survivor option monthly
payments, and life-certain option monthly payments under K.S.A. 74-4918, 74-4964 and 74-4964a. These
payments are taxable for federal income tax purposes and included in federal adjusted gross income.
Because these payments are received directly from KPERS and are included in the KPERS member’s federal
adjusted gross income in the year received they are exempt from Kansas income tax.
In order to claim the exemption from Kansas income tax for the monthly payments a subtraction modification
should be made on the Kansas income tax return. This modification should be an amount equal to the total
amount of the monthly payments. The effect of the modification will be to remove the monthly payments from
Kansas taxable income.
Roll-Over Payments
The withdrawal of accumulated contributions under K.S.A. 74-4917 is considered an eligible rollover
distribution under federal tax law. If a KPERS member elects to do a rollover into a qualified account the
amount of the withdrawn and rolled over contributions will not be included in federal adjusted gross income.
Similarly, the partial lump-sum retirement option under K.S.A. 74-4918, 74-4964 and 74-4964a is considered an
eligible rollover distribution under federal tax law. If a retiring KPERS member elects to do a rollover into a
qualified account the amount of the rolled over partial lump-sum payment will not be included in federal
adjusted gross income.
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Because the rolled over withdrawn accumulated contributions or partial lump-sum retirement payment are not
included in federal adjusted gross income no modification is made on the Kansas income tax return.
Federal law permits rollovers of KPERS funds into a variety of qualified retirement accounts. In some cases the
funds may be placed into a segregated account, such as a traditional IRA. In many cases, however, rollovers
from KPERS are deposited into qualified accounts where they will be commingled with other retirement funds.
By way of example, the receiving account for KPERS rollover distributions may be another employer retirement
plan. Once funds paid by KPERS are rolled over into a qualified account they lose their characterization as
KPERS payments and become assets of the qualified account.
Payments from rollover accounts are received in a variety of ways, including as a lump sum and as annuitized
payments (periodic or monthly payments), such as a monthly payment from an annuity. When a payment is
received, it will be included in federal adjusted gross income. However, none of the payments made from a
rollover account are paid directly by KPERS.
When first issued, Notice 05-04 concluded this section on Roll-Over Payments by stating, “Because rollover of a
KPERS payment deposited into a qualified retirement account is not included in federal adjusted gross income
in the tax year when the KPERS payment was made and it has lost its characterization as a KPERS payment,
payments from that account are not exempt from Kansas income tax. Therefore, no modification is made on the
Kansas income tax return for a payment from a rollover account.” This provision is being revised because of
changes made during the 2007 Legislative Session.
During the 2007 Legislative Session, Senate Substitute for House Substitute for HB 2457 amended K.S.A. 74-
4923(b). The amended statute, K.S.A. 74-4923 now states, in part, as follows:
(b) Any annuity, benefit, funds, property or rights created by, or accruing to any person under the
provisions of K.S.A. 74-4901 et seq. or 74-4951 et seq., and amendments thereto, including but not limited
to, for all taxable years beginning after December 31, 2000, amounts received as a lump-sum payment at
retirement as provided in K.S.A. 74-4918, 74-4964 or 74-4964a, and amendments thereto, and all earnings
thereof, shall be exempt from any tax of the state of Kansas or any political subdivision or taxing body of
the state, and such lump-sum payment at retirement, and all earnings thereof, shall retain such tax exempt
status even if a retirant elects to roll over such lump-sum payment at retirement, and earnings, into a
qualified retirement account whether segregated from or commingled with other retirement funds . . .
Because of the amendments to K.S.A. 74-2923, Kansas law now provided that amounts received by a KPERS
member as a lump sum payment and subsequently rolled over into a qualified retirement account, whether
segregated from or commingled with other retirement funds, are exempt from Kansas income tax. This applies
to all taxable years beginning after December 31, 2000.
Taxpayer Assistance
Additional copies of this notice, forms or publications are available from our web site, www.ksrevenue.org. If
you have questions about income tax, please contact:
Taxpayer Assistance Center
Kansas Department of Revenue
915 SW Harrison St., 1st Floor
Topeka, KS 66612-1588
Phone: 785-368-8222
Fax: 785-291-3614
Date Composed: 05/20/2005 Date Modified: 04/07/2006
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