KY Returns for 2014 - Aarp-tax-aide

Kentucky Returns
KY 740 Instructions
KY- What is new in 2014?
● Standard Deduction $2,400
● Personal tax credits reduced to $10
● No more Hope Credit!
KY will now use American Opportunity Credit
Still using Lifetime Learning Credit
Other rules remain the same
● Mortgage Debt Relief is no longer an
add-back – well, maybe legislation
KY/Federal Differences
4 Filing Statuses on KY return
 “MFS on this COMBINED Return”
 No HOH, QW
Schedule M for modifications
Schedule A has a few differences
Schedule P for pension exclusion
Family Size Tax Credit in place of EIC
KY/Federal Differences
● Exempt income in KY
Interest for federal obligations
Retirement income (all or part)
Social Security
Election workers’ income
● 100% adjustment to income in KY
LTC insurance premiums
Health insurance premiums
KY/Federal Differences
● State income tax not deductible in KY
 Local/occupational taxes are deductible
● Qualified mortgage insurance premiums
ARE deductible
● Dependents can claim self on KY return
● Credits in KY
Child & dependent care, 20% of federal
 Education, 25% of federal
 No EIC
KY Filing Requirements
Chart A & Chart B used
Special rules for self-employment income
 MUST FILE if gross receipts more than MGI
in Chart A
Who is a resident?
 Lived in KY > 183 days
Must/Should File Quiz 1
Mary, age 17, is claimed on her parents’ return.
Her W-2 shows $2,000 in wages and state tax
of $100 withheld. She has no other income.
Must or should Mary file KY return?
Chart A, Family Size 1, MGI not >$11,670
Mary should file to get $100 back
Must/Should File Quiz 2
Pete, 50, and his wife Sarah, 49 both work. They
have three children. They earned $50,000 and
had $3,000 state withholding. Must or should
Pete and Sarah file?
Chart A, Family size 5, MGI >$23,850
Chart B, KY AGI >$3,400
4 Filing Statuses
● Single
HOH, QW from federal will file as Single
● Married filing separately on this
combined return
● Married filing joint
● Married filing separately
Injured Spouse from federal
Married Filing Separately on This
Combined Return
● Usually lower tax liability than MFJ
● Both take the Standard Deduction
If MFJ, only one standard deduction allowed
● TaxWise allocates income and adjustments
Personal Tax Credits
 $10 (1 credit) per TP, spouse & dependent(s)
 Couple can choose how to split dependents
65 or older
Additional $40 per TP &/or spouse
Legally blind
Additional $40 per TP &/or spouse
Member of National Guard
Additional $20 per TP &/or spouse
Purpose of Schedule M?
● Include income not taxed by the
federal government
● Exclude income taxed by the federal
government but not taxed by Kentucky
Key Additions for Schedule M
● Other states’ tax-exempt bonds
● Dividends received from regulated
investment companies (mutual funds)
that are taxable for KY income tax
Key Subtractions for Schedule M
● State Tax Refund reported on federal return
● Interest from US Government bonds
● Excludable retirement income
may have Schedule P
● Taxable Social Security & RR equivalent
● Long Term Care Premiums
● Health Insurance Premiums
● Income of active duty military, reserves &
National Guard
What is the purpose of Schedule P?
● Excludes retirement income from taxation
if >$41,110 AND taxpayer is retired from
federal, KY state, KY local government or
receives railroad retirement board (RRB)
● Amount earned before 1/1/1998 is exempt
● 100% of RRB benefits are exempt
● Up to $41,110 of what is left can be
Pension Exclusion
Did taxpayer retire from federal, KY or
local government or receive
Supplemental (Tier 2) Railroad
Retirement Benefits?
● If yes, Schedule P is needed when total retirement
income is over $41,110.
Did taxpayer retire before 1/1/1998?
● All retirement income earned prior to 1/1/1998 is
exempt and not taxed by KY.
Pension Exclusion Quiz 1
Phil retired from the U.S. Army in 1996.
He received a military pension of $60,000
last year. How much can be excluded?
ALL $60,000
Taxpayer retired prior to 1/1/1998 from
the military
Pension Exclusion Quiz 2
Joe worked for 30 years in the KY legislature,
from January 1, 1978 to December 31,
2007. He received $90,000 in pension
income last year. He has no other
retirement income. How much of his
pension can be excluded?
ALL $90,000
$60,000 earned prior to 1/1/1998 is exempt & not part
of $41,110
$30,000 earned after 1/1/1998 is excluded
Pension Exclusion Quiz 3
Sue worked for 25 years at Ford Motor
Company, from January 1, 1977 to
December 31, 1992. She received $81,110
in pension income last year. She has no
other retirement income. How much of her
pension can be excluded?
No Schedule P is required for Sue because
she is not retired from federal, state or local
retirement systems or the railroad.
Pension Exclusion Quiz 4
Sarah retired from the railroad in 2011 after
40 years of service and received a Form RRB1099-R with Tier 2 benefits of $126,382.
Without using a calculator (because you
don’t need one), how much of her benefit is
All railroad retirement is excluded, no matter
when taxpayer retired. Check Box 2 on the
1099-R but use 100% as the exempt
KY Schedule A
● Taxpayer can itemize on KY even if
he/she did not itemize on federal
● KY Standard Deduction is $2,400 for all
filing statuses
● Taxpayer cannot deduct state taxes, but
can deduct Local /Occupational taxes
● LTC & health insurance premiums do
NOT go on Schedule A
KY Family Size Tax Credit
● Incomes up to 133% of poverty level
qualify for some credit
● Maximum family size is 4
● Taxpayer, spouse in home and qualifying
children are included
Children claimed by noncustodial parent can be
included for this credit
Grandchildren may not carry automatically in
TaxWise but generally meet definition of qualifying
● Nonrefundable credit
KY Education Credits
● Form 8863-K
● Must be undergraduate attending an
institution with a physical presence in KY
● American Opportunity or Lifetime
Learning Credit
● Nonrefundable credit
● 25% of federal amount
● Can be carried forward 5 years
Education Credit Quiz 1
Sarah is a senior at Centre College. Her parents
were able to claim the $2,500 American
Opportunity Credit on their federal return for
her tuition ($12,000) and books she purchased
on the internet ($650). What education credit
may her parents be eligible for in Kentucky?
Eligible for both credits
American Opportunity Credit is better
$2,500*(.25) = $650
Lifetime Learning Credit
$2,000*(.25) = $500
Education Credit Quiz 2
Bonnie is single, age 25. She took courses at
Empire Beauty School in Louisville to become a
licensed cosmetologist. She has a 1098-T showing
tuition paid of $2,500. She has not previously
attended any postsecondary programs. She paid
for her tuition with a student loan. Can she take an
education credit in Kentucky? If so, which one
should she take?
Yes, she should take the AOC
AOC would be $2,000 + ($500)*(.25)= $2,125 on
federal return
AOC would be ($2,125)*(.25) = $531 on KY return
LLC would be only ($2,500)*(.20)*(.25) = $125
Kentucky Use Tax
● Out-of-state purchases used in KY are taxed at
KY tax rate (6%)
● If less than 6% tax paid, TP pays difference
● Has been in the tax code since 1960
● More of an issue today because of online sales
● If taxpayer does not pay at least 6% sales tax
he or she should:
Pay tax annually on Form 740 OR
File Form 51A113 at the time of purchase
Kentucky Use Tax
Can use optional tax table for purchases <$1,000
● See 740 instructions for more information
● Remember due diligence
Use Tax Quiz 1
Susan did not keep track of her out-ofstate purchases, but she thinks they were
about $500. Assume all her purchases
are subject to use tax. Her federal AGI is
$92,000 and her KY AGI is $52,000. What
should she claim on her Kentucky tax
Use tax of $50 using Optional Use Tax
Use Tax Quiz 2
Jim, a KY resident, went on a shopping spree
last year in Virginia. He has receipts for
$1,000 spent on clothing that he brought
back to Kentucky. The sales tax rate in
Virginia is 4%. He has not reported any
sales to Kentucky. What are the use tax
consequences for his Kentucky return?
He should claim $20 in use tax on KY return
$1,000*(.06-.04) = $20
Kentucky Energy Credit
● Form 5695-K
● Different rules than federal credit
● Windows credit includes installation
● Must be primary residence of taxpayer
● Credit is 30% of expenses
● Up to $500 each year, 2009-2015
Maximum of $100 insulation, $250 windows &
doors, $250 qualified energy property
● Credit can be carried forward ONE year
Reciprocal States
● Agreements allow taxpayers in these
states to be taxed by their state of
residence, not where income is earned
● Prevents filing of nonresident tax
Reciprocal States
● May not claim credit for taxes paid to a
reciprocal state
Employers should set up withholding for
KY if taxpayer works in a reciprocal state
● Mostly covers wages and salaries
● See 740 instructions for more
Wrapping it up
● Choose Best Filing Status
Always compare MFJ and “Married Filing
Separately on This Combined Return”
● May want to itemize in KY even if taxpayer
took standard deduction on federal
● Direct deposit available for refunds only if
electronically filed
Kentucky Returns
● Questions?
● Comments?
Completion of Certification
● Attended class, including training on Standards of
Conduct, policies & administration?
● Required workbook problems, completed and reviewed?
Beringer, Webster, Austin, Fleming
● Standards of Conduct test, minimum 80% score?
● Advanced test, minimum 80% score?
● Optional HSA test, minimum 80% score?
● KY test, minimum 80% score?
● Turned in the “TWO Training Evaluation”?