Active Duty Military Pay Income Tax Exemption
Beginning with tax year 2010, Kentucky does not tax active duty military pay. Members of the Armed Forces of the United States, members of reserve components of the Armed Forces of the United States, and members of the National Guard may subtract the amount of pay received from active duty military service, training, and pay received for active service in a combat zone to the extent the income was included in federal Adjusted Gross Income. For full-year residents this income should be subtracted on Kentucky Schedule M and part-year residents should make the subtraction under the Adjustments to Income section on Form 740-NP. The subtraction should be labeled "active duty military pay." (KRS 141.019(1)(I)).
Kentucky income tax is not required to be withheld from active duty military pay. If Kentucky income tax is incorrectly withheld from a servicemember's military pay after 2009, the Kentucky Department of Revenue will refund the tax withheld.
Kentucky income tax is not required to be withheld from active duty military pay. If the military member's only income is active duty military compensation, he or she is not required to file a Kentucky income tax return unless Kentucky income tax was withheld. You would need to file a return to recover any Kentucky income tax withheld.
You are considered a Kentucky resident for income tax purposes if your state of legal residence with the military is Kentucky. The active duty military pay exemption applies to all Kentucky servicemembers regardless of where the servicemember is stationed. If a military member was a Kentucky resident at the time he or she joined the military but is now stationed outside of Kentucky, he or she is still considered a Kentucky resident for income tax purposes and should file Kentucky Form 740.
Serving Outside the United States
Kentucky residents who are in the military are often granted extensions for tax filings when serving outside the United States. Any extension granted for federal income tax purposes will be honored for Kentucky income tax purposes.
Combat Zone Extension—Members of the Army, Navy, Marines, Air Force, or Public Health Service of the United States government who serve in an area designated as a combat zone by presidential proclamation are not required to file an income tax return and pay the taxes, which would otherwise become due during the period of service, until 12 months after the service is completed. Members of the National Guard or any branch of the Reserves called to active duty to serve in a combat zone are granted the same extension.
Interest and Penalties: Interest at the "tax interest rate" applies to any income tax paid after the original due date of the return. If the amount of tax paid by the original due date is less than 75 percent of the tax due, a late payment penalty may be assessed (minimum penalty is $10).
Interest and penalty charges can be avoided or reduced by sending payment with your extension request by the due date. If you wish to make a payment prior to the due date of your return when using the:
Kentucky Extension: Complete Section II, Kentucky Extension Payment Voucher, of Form 740EXT Application for Extension of Time to File and send with payment. Write "KY Income Tax—2018" and your Social Security number(s) on the face of the check.
Federal Automatic Extension: Make a copy of the lower portion of the federal Form 4868 Application for Automatic Extension and send with payment. Write "KY Income Tax—2018" and your Social Security number(s) on the face of the check.
Retirement Income Exclusion
For all individuals, Kentucky allows a pension income exclusion of up to $31,110* for all pension and retirement income that is reported as taxable and included in the federal adjusted gross income. Enter this subtraction on Schedule M Kentucky Federal Adjusted Gross Income Modifications.
If you are retired military, you may be able to exclude more than $31,110*. If you are retired military and receive a federal pension income greater than $31,110*, you will need to complete Kentucky Schedule P Kentucky Pension Income Exclusion to determine how much of your pension income is taxable. You may use the worksheet in the Schedule P instructions or use the Schedule P calculator to determine your exempt percentage.
*($41,110 for taxable year 2017 and earlier)
Please visit the IRS website for additional information regarding military issues.