If you are a resident of Kentucky, whether or not you have to file a Kentucky state income tax return depends upon your family size, modified gross income, Kentucky adjusted gross income and income from self-employment. There are charts in the instructions that you can use to determine if you need to file. If you have had Kentucky state income tax withheld from your pay, it may be to your advantage to file even if you are not required to file in order to obtain a refund.
Part-year residents of Kentucky are subject to state income tax on all their income from all sources while they are residents of Kentucky and on their income from sources in Kentucky while they are not residents. Nonresidents of Kentucky are subject to state income tax on all their income from sources in Kentucky.
If you are a full-year Kentucky resident you use Form 740 or the simpler Form 740-EZ if you qualify. If you are a part-year resident or nonresident you use Form 740-NP. You can also file electronically by using the Free File Offers on the Kentucky Department of Revenue website.
Kentucky deductions
Your Kentucky taxable income is based on your federal adjusted gross income, but there are some deductions you can claim on your Kentucky return. These deductions are claimed on Schedule M – Kentucky Federal Adjusted Gross Income Modifications.
If you had to include a state income tax refund as income on your federal tax return because you claimed a deduction for that tax on a prior year tax return, you can deduct that refund on your Kentucky return.
On your Kentucky tax return you can deduct any interest on U.S. Government obligations that you included as income on your federal tax return.
You can deduct up to $41,110 of retirement benefits that are included as income on your federal return. This includes pensions, annuities, IRA accounts, 401(k) plans, deferred compensation plans, income from converting a regular IRA to a Roth IRA, death benefits and disability retirement benefits. If you are married, each spouse must claim the exclusion separately for his or her retirement benefits.
You can claim a deduction for premiums you paid for long-term care insurance if you did not claim the premiums as an itemized deduction. You can also claim a deduction for health insurance premiums you paid for coverage for yourself, your spouse and dependents. You cannot claim this deduction if you paid the health insurance premiums with pretax dollars, such as through a cafeteria plan at work. Also, if you claim the health insurance credit, you have to reduce the amount of the deduction by the health coverage tax credit you claim on Form 8885.
All income earned by a soldier killed in the line of duty is exempt from Kentucky tax the year the death occurred and the prior year. This exemption applies to all the soldier’s income and not just military income.
Kentucky credits
If your modified adjusted gross income is $29,327 or less (for 2009) you may qualify for the family size tax credit. The credit is a percentage of your tax, based on your level of income and your family size. The threshold amounts for the maximum credit of 100% for 2009 are $10,830 for a family size of one, $14,570 for a family of two, $18,310 for a family of three and $22,050 for a family of four or more. The percentage decreases in increments down to 10% for increasingly higher levels of income, up to the maximum of $29,327.
If you claimed the credit for child and dependent care expenses on your federal return you can claim a credit on your Kentucky return for 20% of the federal credit.
If you purchase a new home between July 26, 2009 and July 25, 2010, you can claim the Kentucky New Home Tax Credit. You must complete an Application for New Home Tax Credit (Form 40A103) with the Department of Revenue and must have received a credit allocation letter with an approval code that you must attach to your tax return. If you file electronically you would enter the information from the credit allocation letter. The New Home Credit is up to $5,000. This is a nonrefundable credit, so the credit is limited to the total amount of tax, after the family size credit, the education credit and the credit for child and dependent care expenses.
If you paid income tax to another state on income that is included in your Kentucky return, you can claim a credit for that tax. Kentucky has reciprocal tax agreements with some states. According to these agreements you are subject to state income tax in the state where you live, rather than in the state where you earned the income. If you worked in Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, or Wisconsin and state income tax was withheld from your pay, you cannot claim a credit on your Kentucky tax return. You would have to file a return in the applicable state to claim a refund for the tax withheld.
If you made improvements to your home or business to increase its energy efficiency, or you installed a renewable energy system, you can claim the Kentucky energy efficiency products tax credit. This credit is claimed on Form 5695-K. You can claim this credit for installing upgraded insulation; energy efficient windows and storm doors; an electric heat pump water heater; an electric heat pump; an open or closed loop or direct expansion geothermal heat pump; a central air conditioning unit; a natural gas, propane, or oil furnace or hot water heater; a hot water boiler including outdoor wood-fired boiler units; an advanced main air circulating fan; an active or passive solar space or water heating system; a wind turbine; or a solar photovoltaic system. The credit is 30% of the installed cost, subject to a maximum credit based on the type of energy efficiency product.
If you paid undergraduate college tuition and you claimed the Hope or lifetime learning credit on your federal tax return, you can claim a credit on your Kentucky return for 25 percent of the federal tax credit. This credit is claimed on Form 8863-K – Kentucky Education Tuition Tax Credit.
There are various state tax credits for business owners in Kentucky that you can claim in Section A of Form 740. You can find more information on these credits in the instructions for Kentucky Form 740.
Sources:
Form 5695-K – Kentucky Energy Efficiency Products Tax Credit – Kentucky Department of Revenue
Form 740 – Kentucky Individual Income Tax Return – Kentucky Department of Revenue
Form 740-EZ – Kentucky Individual Income Tax Return – Kentucky Department of Revenue
Form 740-NP – Kentucky Individual Income Tax Return Nonresident or Part-Year Resident – Kentucky Department of Revenue
Form 8863-K – Kentucky Education Tuition Tax Credit – Kentucky Department of Revenue
Free File Offers – Kentucky Department of Revenue
Kentucky Individual Tax Booklet, Forms and Instructions – Kentucky Department of Revenue
Schedule M – Kentucky Federal Adjusted Gross Income Modifications – Kentucky Department of Revenue
