Kentucky residents must pay taxes on their retirement income, including pensions. However, a portion of the pension is excluded from Kentucky tax. You must complete a worksheet to determine your total taxable pension amount and report the pension on your Kentucky tax return.
Kentucky offers an exclusion from tax for pensions. As of 2011, the exclusion is $41,110. Thus, you don't have to pay tax on pensions that are less than this amount. However, if you receive more than $41,110 in pension income, you will have to pay taxes on the excess.
If you receive a pension greater than $35,700 and you retired from the Kentucky government or receive supplemental U.S. Railroad Retirement Board Income, your pension is subject to different exclusion requirements. Your exclusion amount includes your government or railroad retirement amount as well as the lesser of $35,700 or other retirement income.
If a nonresident must file Kentucky taxes, she only reports pension income that she received while in Kentucky. For example, if a resident moved out of Kentucky partway through the year, the resident only reports pension income that she received prior to her move. Pension income she received after she left Kentucky is reported to her new state of residence.
Pensioners who retired after December 31, 1997, must take service credits into account when determining their exclusion amount each year. Service credits are months or years of service and are used to calculate pension amounts. When it comes to the exclusion, service credits may determine how much of the pension is taxable. Employees may also purchase service credits from the Kentucky government.