Military Tax Issues

Military Pay Income Tax Exemption

Effective for taxable years beginning on or after January 1, 2010, all military pay received by active duty 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 is exempt from Kentucky income tax per KRS 141.019(1)(l).

Active duty servicemembers will claim the exemption by excluding military pay when filing a Kentucky individual income tax return. Provided the military member has no income other than military pay, he or she is not required to file a Kentucky income tax return. The active duty military pay exemption applies to all Kentucky servicemembers regardless of where the servicemember is stationed. Kentucky income tax should no longer be withheld from checks received for military pay beginning January 1, 2010. 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.

Does Kentucky tax active duty military pay?

No. 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, including 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."

Is Kentucky income tax required to be withheld from active duty military pay?

No. Kentucky income tax is not required to be withheld from active duty military pay.

If my only income is active duty military compensation, am I required to file a Kentucky income tax return?

No. You are not required to file a Kentucky income tax return if you have only received active duty military pay unless you had Kentucky income tax withheld. You would need to file a return to recover any Kentucky income tax withheld.

I was a Kentucky resident when I joined the military, but I am now stationed outside of Kentucky. Am I still considered a Kentucky resident for income tax purposes?

Yes. As long as your state of legal residence with the military is Kentucky, you are considered a Kentucky resident for income tax purposes. You should file Kentucky Form 740.

Military Spouses Residency Relief Act

The Military Spouses Residency Relief Act (MSRRA) (Public Law 111-97) was signed into law on November 11, 2009. This law is effective for taxable years beginning 2009 and after. The MSRRA allows the same residency benefits permitted to military personnel under the Servicemembers Civil Relief Act (SCRA) to also apply to a military spouse's nonmilitary service income under certain circumstances.

The MSRRA prohibits a servicemember's spouse from either losing or acquiring a residence or domicile for purposes of taxation because he or she is absent or present in any U.S. tax jurisdiction solely to be with the servicemember in compliance with the servicemember's military orders, if the residence or domicile is the same for the servicemember and the spouse. The MSRRA also prohibits a spouse's income from being considered income earned in a tax jurisdiction if the spouse is not a resident or domiciliary of such jurisdiction when the spouse is in that jurisdiction solely to be with a service member serving under military orders.

Military spouses who fall under this law should file Form 740-NP Kentucky Individual Income Tax Nonresident or Part-Year Resident Return to request a refund of the Kentucky income tax withheld from his or her pay. The income is not reported as taxable on the Kentucky income tax return. To assist the Kentucky Department of Revenue in identifying those returns, please check the box labeled Military Spouse. Those military spouses that qualify under the MSRRA should file a new Form K-4 with his or her employer to claim an exemption from Kentucky income tax withholding. Please address any further questions to the Individual Taxpayer Assistance Section at (502) 564-4581.

I am a nonresident spouse of an active duty military member who is not subject to Kentucky income tax because my spouse's state of legal residence is not Kentucky. As a military spouse is my income taxable to Kentucky?

No. Your income is not taxable if the following apply:

The active duty servicemember is present in Kentucky in compliance with military orders.
You, the spouse, are in Kentucky solely to be with the active duty servicemember.
You, the spouse, maintain residence in another state, which is the same state of residence as the servicemember.

If these conditions apply, you may file a new Form K-4 with your employer to claim an exemption from withholding of Kentucky income tax.

I qualify for military spouse relief, but my employer withheld income tax. How do I recover this withholding?

You should file Form 740-NP Kentucky Individual Income Tax Nonresident or Part-Year Resident Return to request a refund of Kentucky income tax withheld. Your income will not be reported as taxable on the Kentucky income tax return and you will need to check the box labeled Military Spouse. Military spouses that qualify under the MSRRA should file a new Form K-4 with his or her employer to claim the exemption from withholding of Kentucky income tax.

I am married and I was stationed in Kentucky the entire tax year. My state of legal residence is Florida, but my spouse was never a resident of Florida when we moved to Kentucky per military orders. Does my spouse qualify for military spouse relief?

No. The spouse's income is subject to Kentucky income tax. MSRRA requires that the servicemember and spouse have the same domicile prior to moving to Kentucky per military orders to qualify. The military spouse would be taxed as a full year Kentucky resident.

Military Retirement

Kentucky allows a pension income exclusion of up to $31,110* for all pension income that is reported as taxable and included in the federal adjusted gross income. You may be able to exclude more than $31,110. If you are retired military and receive pension income greater than $31,110, you will need to complete Kentucky Schedule P Kentucky Pension Income Exclusion.

*($41,110 for taxable year 2017 and earlier)

I am retired from the military and I received a taxable pension of $25,000. Is this income taxable to Kentucky?

No. This income is excluded from income on the Schedule M Kentucky Federal Adjusted Gross Income Modifications. Kentucky allows all pension and retirement income to be excluded up to $31,110. Enter this subtraction on Schedule M.

I am retired from the military and I received taxable pension of $52,000, is this income taxable to Kentucky?

Yes. A portion of your $52,000 pension income may be taxable to Kentucky. Kentucky allows all pension and retirement income to be excluded up to $31,110, but if you are retired from the federal government then you may be able to exclude more than $31,110. You must complete Schedule P to determine how much of your pension income is taxable. You will use the worksheet in the Schedule P instructions to determine your exempt percentage.

Military Filing Extensions

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

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 be 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.

You may also visit the IRS website for additional information regarding military issues.

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Military Spouse Exemption Form K-4 - Kentucky Withholding Certificate

Calculator for Federal, Kentucky State and Kentucky Local Government Retirees Who Retired After 12/31/1997

Please visit IRS.gov/individuals/military for more information on military issues.