Kentucky tax: post-1998 service and the $31,110 exclusion

Short answer: a TRS of Kentucky pension is subject to federal income tax. Kentucky taxes only the part earned by service after Jan. 1, 1998, and only above a $31,110 pension income exclusion, so many retirees owe no Kentucky tax on it. If you retired before 1998, it's exempt. TRS 1-3 Service Retirement bulletin p. 2, Taxes; TRS 4 SPD p. 18; KRS 161.700(3); KRS 141.019(1)(g)1.b. (tax years beginning on or after Jan. 1, 2018); TRS 1-3 SPD (2011) p. 33

• TRS of Kentucky benefits are subject to federal income tax.TRS 4 SPD p. 18
• For Kentucky income tax, only the part of your benefit earned by service after Jan. 1, 1998 is taxable, and only after a $31,110 pension income exclusion (all pension income combined). Many TRS of Kentucky retirees owe no Kentucky tax on their benefit.TRS 1-3 Service Retirement bulletin p. 2; TRS 4 SPD p. 18; KRS 161.700(3); KRS 141.019(1)(g)1.b.
• Benefits of members who retired before Jan. 1, 1998 are exempt from Kentucky income tax.TRS 1-3 SPD (2011) p. 33
• If you made contributions before August 1982 or made personal payments to TRS of Kentucky, a small part of each payment is excluded from federal tax over your expected lifetime (or your beneficiary's).TRS 1-3 SPD (2011) p. 33, Federal

Kentucky income tax

How to check your own Kentucky tax

To see whether you owe Kentucky tax, the 2011 plan description says to multiply box 2a of your 1099-R by the state taxable percentage, add your pension income from all other sources, and compare the total with the Kentucky pension exclusion. TRS 1-3 SPD (2011) p. 33, State of Kentucky Each January, TRS of Kentucky sends a Form 1099-R showing your gross benefit, tax withheld, federal taxable income and the income subject to Kentucky tax. The IRS and the Kentucky Revenue Cabinet get the same information. TRS 1-3 SPD (2011) p. 33, Retirement Allowances; TRS 4 SPD p. 18

TRS of Kentucky's sources don't explain how the pre- and post-1998 share is figured for your benefit, so we don't estimate your Kentucky tax. Your 1099-R (it shows the state taxable percentage) and the Kentucky Form 740 instructions are the place to check.

Federal tax

Annuity payments and other distributions are subject to federal income tax. TRS of Kentucky sends a 1099-R each January and withholds federal tax per the W-4P on file. TRS 4 SPD p. 18, Taxes; TRS 1-3 Service Retirement bulletin p. 2, Taxes

Contributions are picked up by the employer and tax-deferred. KRS 161.540(2); TRS 4 SPD p. 18; TRS 1-3 SPD (2011) pp. 32-33

Withholding

TRS of Kentucky withholds Kentucky tax on request (separate form) but not for other states or local jurisdictions. TRS 4 SPD p. 18; TRS 1-3 Service Retirement bulletin p. 2

Withholding is optional, but not withholding enough federal tax can bring an IRS underpayment penalty. The TRS of Kentucky withholding form has separate federal and Kentucky sections, and retirees can change their elections at any time. TRS 4 SPD p. 18, Taxes (federal, state) and withholding

Refunds

No withdrawal while working in a TRS-covered position. Refund available 60 days after the last day of employment. A refund cancels membership and service. Members eligible for an immediate service retirement cannot refund (narrow exceptions). Health insurance contributions are not refundable. Refunds paid directly to the member have at least 20% federal withholding and may face an IRS early-withdrawal penalty under 59 1/2. KRS 161.470(6); TRS 4 SPD p. 10, Refund of account See leaving teaching.

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