Is interest from state and municipal bonds and bond mutual funds subject to Kansas income tax?

Plain-English summary

An individual taxpayer asked how Kansas income tax treats interest from state and municipal obligations, including bonds and mutual funds. The Department explained:

• Generally taxable: interest income received, credited, or earned during the taxable year from any state or municipal obligations (such as bonds and mutual funds) is subject to Kansas income tax. The taxpayer may reduce the income by related expenses directly incurred in purchasing these obligations, such as management or trustee fees.
• Kansas-bond exception: interest on obligations of the state of Kansas or any political subdivision issued after December 31, 1987 (see K.S.A. 79-32,117i(i)) should not be included in Kansas taxable income. Also excluded are certain bonds exempted by Kansas law: Kansas Turnpike Authority bonds; Board of Regents bonds for Kansas colleges and universities; Urban Renewal bonds; Industrial Revenue bonds; and Kansas Highway bonds.
• Mixed funds: if the taxpayer is a shareholder in a fund that invests in both Kansas and other states' bonds, only the interest on Kansas bonds issued after December 31, 1987 is exempt from Kansas income tax. Use the fund administrator's information to determine how much bond interest is subject to Kansas income tax.

What this means for you

If you earn interest from municipal bonds or bond funds and file Kansas income tax, most of that interest is taxable to Kansas — the main exception is qualifying Kansas bonds.

• Other states' bond interest is taxable in Kansas (unlike the federal treatment of muni interest).
• Qualifying Kansas bond interest is exempt — Kansas/political-subdivision obligations issued after December 31, 1987, plus the specific listed bond types.
• Reduce by related expenses. You may subtract management or trustee fees directly incurred to purchase the obligations.
• For mixed bond funds, only the Kansas-bond portion (post-1987) is exempt; rely on your fund administrator's breakdown to compute the taxable amount.

Common questions

Is out-of-state municipal bond interest taxable in Kansas?
Yes. Interest from any state or municipal obligations is generally subject to Kansas income tax, except qualifying Kansas obligations.

Which Kansas bond interest is exempt?
Interest on Kansas/political-subdivision obligations issued after December 31, 1987 (K.S.A. 79-32,117i(i)), and listed bonds: Kansas Turnpike Authority, Board of Regents, Urban Renewal, Industrial Revenue, and Kansas Highway bonds.

Can I deduct related expenses?
Yes. You may reduce the income by related expenses such as management or trustee fees directly incurred in purchasing the obligations.

What about a fund holding both Kansas and other states' bonds?
Only the interest on qualifying Kansas bonds (issued after December 31, 1987) is exempt; use the fund administrator's information to determine the taxable portion.

Citations and references

• K.S.A. 79-32,117i(i) — referenced by the Department for the exclusion from Kansas taxable income of interest on Kansas/political-subdivision obligations issued after December 31, 1987.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1999-86.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 22, 1999

TTTTTTTTTTT
TTTTTTTTTTT
TTTTTTTTTTT

Dear Mr. TTTTTT:

We wish to acknowledge receipt of your letter dated March 2, 1999, regarding the imposition of Kansas Income Tax.

Interest income received, credited, or earned by you during the taxable year from any state or municipal obligations such as bonds and mutual funds would be subject to Kansas Income Tax. You may reduce the income amount by any related expenses (such as management or trustee fees) directly incurred in purchasing these state or political subdivision obligations. However, interest income received, credited, or earned on obligations of the state of Kansas or any political subdivision thereof issued after December 31, 1987, [See K.S.A. 79-32,117i(i)], or the following Bonds exempted by Kansas law should not be included in your Kansas taxable income:

Kansas Turnpike Authority Bonds

Board of Regents Bonds for Kansas Colleges and Universities

Urban Renewal Bonds

Industrial Revenue Bonds

Kansas Highway Bonds

In closing, if you are a shareholder in a fund that invests in both Kansas and other states’ bonds, only the interest received, credited, or earned on Kansas bonds issued after December 31, 1987 is exempt from Kansas Income Tax. Kindly, use the information provided by your fund administrator to determine the amount of bond interest subject to Kansas Income Tax.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially affects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 04/02/1999 Date Modified: 10/10/2001

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