Moving to Kentucky

Kentucky taxes residents on everything, nonresidents on what they earn in Kentucky, and in the year you move you are both. A resident is anyone domiciled in Kentucky, and anyone who keeps a place to live here and spends more than 183 days of the year in it is taxed as a resident whatever they call home. The move-year return is Form 740-NP, which reports all income received while a resident plus Kentucky-source income from the rest of the year, allows the full $3,360 standard deduction, and applies the flat 3.5% to the result. Kentucky’s border is long and busy, and the rules for crossing it are unusually generous for wages: a resident of Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia or Wisconsin who works in Kentucky pays only the home state on those wages, and a Kentuckian working in any of those states pays only Kentucky. Two things the agreements do not cover are where people go wrong: any income other than wages, and the city or county occupational taxes, which are owed wherever the work is done regardless of which state you live in.

Who is a resident

The test is domicile: the one place you intend to return to and call home, shown by where you live, vote, hold a driver’s license, register cars and keep your family. A Kentucky domiciliary on a two-year assignment in Texas is still a Kentucky resident and files Form 740 on everything. A person domiciled elsewhere becomes a Kentucky resident by establishing a new domicile here, and the move-in date is the day the old home was abandoned and the new one taken up.

There is a second way to become a resident without meaning to. A person domiciled in another state who maintains a place of abode in Kentucky and spends more than 183 days of the tax year in Kentucky is treated as a resident for that year, taxed on all income, though the return is still Form 740-NP. The reciprocal agreements fall away at the same line: a Cincinnati resident who keeps a Covington apartment and sleeps in it 200 nights a year is a Kentucky resident, reciprocity or not. Military members keep their home of record; a servicemember whose home of record is Kentucky is a Kentucky resident wherever stationed, and active-duty pay is exempt in any case.

The part-year return: Form 740-NP

Someone who moved into Kentucky reports Kentucky-source income received before the move and all income received after it; someone who moved out, the reverse. Wages are sourced by where the work was done; interest, dividends and pension payments by residence on the date received; rent and business income by where the property or business is; a gain by residence on the date of sale, unless the property is Kentucky real estate, which is Kentucky-source wherever the owner lives.

Form 740-NP works out a Kentucky percentage, Kentucky income over total income, and uses it for one purpose: itemized deductions on the Kentucky Schedule A are multiplied by it. The $3,360 standard deduction is entered in full on line 10 and is not prorated, so a mover with half a year in Kentucky usually takes it. The $31,110 pension exclusion applies to retirement income received while a Kentucky resident, up to the full amount. The Family Size Tax Credit uses the household’s modified gross income for the whole year (verify). The credit for tax paid to another state is available for income taxed by both states during the resident period. Refunds on Form 740-NP come by paper check only.

Reciprocity: wages only, seven states

Under regulation 103 KAR 17:140 Kentucky has agreements with seven of its neighbors. Each says the same thing in principle: a resident of the other state who earns wages in Kentucky owes Kentucky nothing on them, and a Kentucky resident who earns wages in the other state owes that state nothing. Each person files one return, at home, on all income. The fine print differs by state.

Reciprocity ends for anyone who spends more than 183 days in Kentucky during the year. It never covers business profits, partnership or S corporation distributive shares, rent, gambling winnings or the sale of Kentucky property, all of which a nonresident reports to Kentucky on Form 740-NP. Tennessee and Missouri are not on the list; Tennessee has no wage tax, so nothing is lost, while a Missouri commuter uses the credit described below.

The mechanics run in both directions. An Indiana resident working in Louisville gives the employer Form 42A809, Certificate of Nonresidence, and no Kentucky tax is withheld; if the employer withheld anyway, the worker files Form 740-NP-R, a one-page return that exists only to refund the withholding. A Kentucky resident working in Cincinnati, Evansville or Huntington should give that employer the other state’s nonresident certificate and have only Kentucky tax withheld, with Form 740-ES as the backstop if the employer will not. The Kentucky resident then reports the wages on Form 740 like any other and takes no credit for the other state, because the other state has no claim: tax withheld for Ohio or Indiana by mistake is refunded by Ohio or Indiana on their nonresident forms. The Department says so in terms: no credit is allowed for tax withheld by a reciprocal state on reciprocal income.

Credit for tax paid to another state

For income taxed by a state that is not on the list, or for non-wage income taxed by one that is, a Kentucky resident takes the credit on Schedule ITC Section A, line 6, computed on Worksheet A, one per state. The credit is the lesser of the tax actually paid to the other state on the doubly taxed income or the Kentucky tax on that same income, which at 3.5% is often the smaller. A Kentucky resident with a $20,000 rental profit in a state with a 5% rate pays that state $1,000 and gets a Kentucky credit of $700; the other $300 is the cost of owning property there. The other state’s return must be filed and a copy enclosed; withholding alone does not earn the credit. The credit does not reach local taxes: tax paid to a city or county in another state, including Indiana’s county income tax withheld from a Kentuckian’s pay, earns no Kentucky credit (verify).

Remote work across the line

Kentucky taxes a nonresident on wages for work physically performed in Kentucky, and a resident on wages wherever performed. The Department has no convenience-of-the-employer rule that would tax an out-of-state employee of a Kentucky company for days worked at home in another state (verify). The usual cases come out as follows.

• Kentucky resident, works from home for an employer in a reciprocal state. Kentucky taxes everything. The other state has no claim even on days spent at the office there. No credit, no second return.
• Kentucky resident, works from home for a Tennessee employer. Kentucky taxes everything; Tennessee taxes no wages. The employer may not withhold Kentucky tax, so estimated payments on Form 740-ES are needed above $500 of expected tax.
• Kentucky resident, works from home for a New York employer. New York applies its convenience rule and taxes the wages. Kentucky taxes them too and gives the Worksheet A credit, limited to Kentucky’s 3.5%; the excess New York tax is lost.
• Resident of a reciprocal state, works from home for a Louisville employer. No Kentucky income tax on the wages, at home or in the office. But the Louisville occupational tax applies to the days worked inside the Metro.

The local taxes reciprocity does not touch

Most Kentucky cities and counties levy an occupational license tax on wages earned and net profits made inside their borders, and many Ohio and Indiana localities do the same. None of the state agreements reach them. An Indiana resident working in Louisville pays Louisville Metro’s nonresident rate of 1.45%, withheld from pay, with no credit from either state. A Kentucky resident working in Cincinnati pays Cincinnati’s earnings tax and gets no credit on Form 740; Kentucky localities generally tax where the work is done, not where the worker lives, so the Kentucky county usually takes nothing on those wages. A Kentucky resident working in an Indiana county owes that county’s income tax, with no Kentucky relief. The consolation is that the local taxes never touch retirement income, interest, dividends or capital gains.

Leaving Kentucky

A Kentuckian who moves away files a final Form 740-NP as a part-year resident, reporting all income through the move date and Kentucky-source income after it. What stays Kentucky-source after a move is a Kentucky rental, a Kentucky business, wages for days worked back in Kentucky, and the gain on selling Kentucky real estate, taxed here even years later; the federal home-sale exclusion carries over because Kentucky starts from federal AGI. A pension or IRA is not Kentucky-source once you have left; federal law bars Kentucky from taxing a former resident’s retirement income. A Kentucky domiciliary who keeps the house, the license and the voter registration while spending winters elsewhere has not left, and a return that simply stops will be treated as a resident’s return that was never filed.

What to do the year you move

• Write down the move date and keep the evidence: lease or closing statement, utility start dates, the new driver’s license and voter registration.
• Give your employer a Kentucky K-4 and the move date, and ask it to stop withholding for the old state. If you live in Kentucky and work in a reciprocal state, give that employer its nonresident certificate.
• Ask what occupational tax applies where you work. If you are self-employed, register with the city or county for the net-profit return.
• Ask your brokerage and pension payer for income by date so the year can be split; the 1099s will not do it for you.
• Apply for the homestead exemption with the Property Valuation Administrator if you are 65 or disabled and own the new home, by December 31.
• If you expect Kentucky tax above $500 with no Kentucky withholding, start Form 740-ES payments the quarter after you arrive.