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The information below provides an overview of the major changes to state and federal income tax laws.  Please choose one of the categories below to learn more about the 2018 changes.

Kentucky Tax Changes

Tax Rates

For tax years beginning on or after January 1, 2018

The previous rate brackets have been replaced with a flat 5% tax rate.

Deductions

Effective January 1, 2018, the following deductions were eliminated and can no longer be used to reduce Kentucky income:

  • Premiums paid for health insurance coverage
  • Premiums paid for long-term care insurance
  • Master Tobacco Settlement payments
  • The value of property leasehold interests donated and used for homeless shelters 

Itemized Deductions

Kentucky eliminated nearly all itemized deductions, while for federal tax purposes most itemized deductions remain the same.  For information on federal tax changes please contact the IRS.

The following items can still be claimed as Kentucky itemized deductions:

  • Home mortgage interest, points, and qualified mortgage insurance premiums
  • Charitable contributions
  • Some miscellaneous deductions
    • Amortizable premium on taxable bonds (IRC Sec 171)
    • Federal estate tax on income in respect of a decedent (IRC Sec 691)
    • Repayments of more than $3,000 under a claim of right (IRC Sec 1341)
    • Unrecovered investment in an annuity (IRC Sec 72)
    • Loss from other activities from Schedule K-1 (Form 1065-B, box 2)

The following items can no longer be claimed as Kentucky itemized deductions:

  • Investment interest (IRC Sec 163)
  • Taxes (IRC Sec 164)
  • Casualty or theft losses and gambling losses (IRC Sec 165)
  • Medical and dental care expenses (IRC Sec 213)
  • Moving expenses (IRC Sec 217)
  • Other miscellaneous deductions subject to the 2% floor (IRC Sec 67)

Other changes include:

  • The itemized deduction dollar limit cap was eliminated
  • Investment income earned on a STABLE account is no longer taxed
  • The pension exclusion decreased from $41,110 to $31,110. You are still entitled to exclude more than $31,110 if you are retired from the federal government, the Commonwealth of Kentucky, or a Kentucky local government and a portion of your pension income is attributable to federal or Kentucky government service performed prior to January 1, 1998.
  • $10 personal tax credit for taxpayers and dependents were eliminated
  • Personal tax credits for over-age-65, blind, and National Guard members were maintained

Tax Credits

  • Inventory Tax Credit – a non-refundable and non-transferable income tax credit is allowed for ad valorem (property) taxes timely paid on inventory and is phased in as follows:
    • 2018 – 25% of tax paid
    • 2019 – 50% of tax paid
    • 2020 – 75% of tax paid
    • 2021 and forward - 100% of tax paid
  • Film Tax Credit – new applications are non-refundable and non-transferable after April 27, 2018. An annual cap of $100 million applies to 2018 and thereafter. Commercials no longer qualify for the credit.


Federal Tax Changes

Kentucky updated its federal conformity date to December 31, 2017, and adopted the following changes in the Tax Cuts and Jobs Act (TCJA):

  • Net Operating Losses limitations (IRC Sec 172)
  • Net Interest Expense Limitations (IRC Sec 163(j))
  • Repeal of the Domestic Production Activity Deduction (IRC Sec 199)
  • Repeal of the exclusion for qualified moving expense reimbursements (IRC Secs 82 and 132)
  • Repeal of the deduction for qualified moving expenses (IRC Sec 217)
  • Repeal of the deduction for alimony payments and the inclusion of alimony received in taxable income for divorce agreements entered into after December 31, 2018 (IRC Secs 61 and 215)

Kentucky did NOT adopt the following changes in the TCJA:

  • Full Depreciation Expensing (IRC Sec 168(k))
  • Deduction for Qualified Business Income of Pass-Through Entities (IRC Sec 199A)

Read Frequently Asked Questions for Individual Income Tax

Kentucky Tax Changes

Kentucky made changes to five major areas of its corporation and pass-through entity income tax law: tax rates, apportionment, group filing methods and NOL provisions, electronic filing requirements, and tax credits.

  Tax Rates

   For tax years beginning on or after January 1, 2018

   The previous rate brackets have been replaced with a flat 5% tax rate.

  Apportionment 

   For tax years beginning on or after January 1, 2018:

  • Single Sales Factor
  • Market Based Sales Sourcing
    • Receipts sourced to Kentucky if:
      • Sale, rental, lease, or license of real property if the property is in KY
      • Rental, lease, or license of tangible property if and to the extent the property is in Kentucky
      • Sale of service to the extent the service is delivered in Kentucky
      • Receipts from services and the sale of intangibles are in Kentucky if the taxpayer's market for the sales is in Kentucky
      • Intangible property to the extent it is used in Kentucky
        • Throw-out rule for receipts attributable to intangible property if the taxpayer is not taxable in the state to which the receipts are assigned or the state of  assignment is indeterminable
  • Three-factor apportionment retained for companies in the business of providing:
    1. Communications service as defined in KRS 136.602;
    2. Cable service as defined in KRS 136.602; or
    3. Internet access as defined in 47 USC Sec 151
  • Special Apportionment
    • Passenger Airlines and Qualified Freight Forwarders
  • Alternative Apportionment
    • Taxpayer must prove by clear and convincing evidence that the apportionment requirements do not fairly represent the extent of the taxpayer's activity in Kentucky 

  Group Filing Methods and

  Net Operating Loss Provisions

   For tax years beginning before January 1, 2019:

  • Filing: Mandatory Nexus Consolidated or Separate Entity
  • NOL: 2018 is the final year for 50% NOL limitation for mandatory nexus consolidated group filers

   For tax years beginning on or after January 1, 2019:

  • Filing:
    • Unitary Combined Group filing required; unless
    • The group elects a 96 month same-as-federal consolidated group filing; otherwise
    • Separate entity filing if not part of a unitary or consolidated group
  • NOL:
    • Adopt the 80% federal NOL limitation under IRC Sec 172(a) for NOL generated after January 1, 2018
    • Adopt federal unlimited carryforward of NOL generated after January 1, 2018
    • Kentucky does not allow a NOL carryback for tax years beginning on or after January 1, 2005 

  Electronic Filing

   For tax years beginning on or after January 1, 2019:

  • e-Filing required for separate corporation and pass-through entity returns with federal gross receipts exceeding $1,000,000

  Tax Credit Changes

  • Inventory Tax Credit – a non-refundable and non-transferable income tax credit is allowed for ad valorem (property) taxes timely paid on inventory and is phased in as follows.
    • 2018 – 25% of tax paid
    • 2019 – 50% of tax paid
    • 2020 – 75% of tax paid
    • 2021 and forward – 100% of tax paid
  • Film Tax Credit – new applications are non-refundable and non-transferable after April 27, 2018. An annual cap of $100 million applies to 2018 and thereafter. Commercials no longer qualify for the credit.


Federal Tax Changes

Kentucky updated its federal conformity date to December 31, 2017, and adopted the following changes in the Tax Cuts and Jobs Act (TCJA):

  • Net Operating Losses limitations (IRC Sec 172)
  • Net Interest Expense Limitations (IRC Sec 163(j))
  • Repeal of the Domestic Production Activity Deduction (IRC Sec 199)
  • Taxation of Foreign Derived Intangible Income (FDII) (IRC Sec. 250)

Kentucky did NOT adopt the following changes in the TCJA:

  • Full Depreciation Expensing (IRC Sec 168(k))
  • Deduction for Qualified Business Income of Pass-Through Entities (IRC Sec 199A)

Read Frequently Asked Questions for Corporation and Pass-Through Entity Taxes

Updates

  • The electronic filing threshold for withholding statements (W-2, W-2G, and 1099 Series) has been lowered from 100 to 26 forms. Withholding statement reporting is January 31, 2019, and no extensions are available.
  • DOR will no longer provide blank Forms W-2. Forms are available at office supply stores.
  • Paper withholding statements (under 26) must either be submitted on a new Form K-5 or in an accepted electronic format beginning in January 2019. The new form will be available on DOR's website and can be electronically submitted.
  • The transmitter report (Form 42A806) is still required to accompany CD's and other physical media.
  • As in prior years, W-2 data files must be submitted in the Social Security Administration's EFW2 format with state RS Records defined by DOR. W-2G and 1099 Series data files must be submitted in the IRS Publication 1220 format with state B Records defined by DOR.

Resources

The following resources are available to assist employers withhold correctly from employee wages.

Read Frequently Asked Questions for Withholding Tax

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