Does Kentucky Tax Military Retirement?
For military retirees, the transition from active duty to civilian life can be a complex and often overwhelming experience. One important consideration is the tax implications of their military retirement pay. In Kentucky, where the military has a long and storied history, it’s essential to understand whether the state taxes military retirement benefits.
State Taxation of Military Retirement Benefits
In the United States, federal law (10 U.S.C. § 1301) prohibits states from taxing the military retirement pay of federal retirees. However, many states, including Kentucky, have chosen to tax this income.
Kentucky’s Taxation of Military Retirement Benefits
Kentucky does tax military retirement pay, but the state provides some relief through its taxation laws. Here are some key points to consider:
- Federal Tax-Exempt Income: Federal military retirement pay is tax-exempt under 10 U.S.C. § 1301. This means that Kentucky, as a state, cannot tax this income.
- Kentucky State Tax Exemption: Kentucky law exempts the first $6,000 of military retirement pay from state income tax (KRS 141.020). This exemption is available to both active duty and retired military personnel.
- Taxes on Excess Income: Income above the exempted amount is subject to Kentucky state income tax. The state tax rate ranges from 2% to 6% depending on the taxpayer’s income level.
- Local Taxes: Some counties in Kentucky may impose a local income tax, which could affect military retirees.
Impact of Kentucky Taxes on Military Retirement Benefits
To better understand the tax implications, let’s consider an example:
| Annual Military Retirement Pay | State Taxable Amount | State Tax Liability (5.2% tax rate) |
|---|---|---|
| $30,000 | $24,000 (=$30,000 – $6,000 exemption) | $1,248 |
| $50,000 | $44,000 (=$50,000 – $6,000 exemption) | $2,312 |
| $70,000 | $64,000 (=$70,000 – $6,000 exemption) | $3,368 |
As shown in the table, the exemption only applies to the first $6,000 of military retirement pay. Income above this amount is subject to Kentucky state income tax. The state tax liability increases as the military retirement pay increases.
Relief from Kentucky Taxes on Military Retirement Benefits
While Kentucky taxes military retirement benefits, there are some options to minimize the tax impact:
- Consult with a Tax Professional: Military retirees should consult with a tax professional to ensure they are taking advantage of available tax credits and deductions.
- Itemize Deductions: Itemizing deductions on federal tax returns may help reduce the taxable amount subject to Kentucky state income tax.
- Consider Forming a Tax-Efficient Estate Plan: Consulting with an estate planning attorney can help military retirees optimize their estate plan to minimize state taxes.
Conclusion
In conclusion, Kentucky taxes military retirement benefits, but the state provides some relief through its taxation laws. Military retirees should be aware of the exemption for the first $6,000 of retirement pay and understand the tax implications of income above this amount. By consulting with a tax professional and exploring available tax credits and deductions, military retirees can minimize the tax impact of their retirement benefits in Kentucky.
