All benefits attributable to service earned on or before December 31, 1997, are exempt from Kentucky income tax. The portion of the member’s benefits earned January 1, 1998, and after is subject to Kentucky income tax; however, this income may be excludable up to a certain amount (see Schedule P in the Kentucky income tax forms for the exclusion amount and calculation). If you are not sure what portion of your service credit was earned on or before December 31, 1997, you may contact our office and request a service breakdown.
Retirement credit for unused sick leave is considered to be earned service at the time of retirement.
Retirement income from all sources including KERS, CERS and SPRS benefits earned January 1, 1998 or after, as well as income from private pensions such as IRAs, Deferred Compensation and others may be excludable up to a certain amount. KRS does not withhold Kentucky taxes from retirement benefits.
EXAMPLE: Jenny was employed by the state government in 1989. She retired at the end of 2014 with 27 total years. Ten years of that service credit was earned prior to January 1, 1998. Her KERS pension for the 2018 calendar year is $30,000. She will also receive $15,000 from Deferred Compensation. Her 2018 state tax computation is outlined below:
1. Compute taxable pension income from KERS:
Jenny earned 17 of her 27 years of service credit after January 1998 or 62.96%. Take this percentage and multiply by her annual benefit of $30,000, the amount of her KERS benefit subject to state income taxes is $18,888.00.
17 years ÷ 27 years total = 62.96%
$30,000 X 62.96% = $18,888.00
2. Add taxable pension income from all sources:
3. Apply the exclusion:
*Pension exclusion amount changed from $41,110 to $31,110 due to House Bill 366 during the 2018 legislative session.
$31,110 (pension exclusion)
4. Taxable pension income for KY income taxes: $2,778.00