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 Taxation of Benefits

Federal income tax

Monthly benefits from KERS, CERS and SPRS are subject to federal income tax. For members who have made taxed contributions to KRS and elect to receive monthly benefits, current Internal Revenue Service regulations provide that the amount of after-tax dollars in the account be recovered by making a portion of each monthly benefit non-taxable. The non-taxable portion of each monthly benefit is referred to as the monthly exclusion and represents those contributions paid to the Retirement System prior to August 1, 1982, and any service purchases or re-contributions paid with taxed income.
The monthly exclusion, which is a specific dollar amount, remains the same and is not affected by increases in the recipient’s retirement benefit. The monthly exclusion will continue until there are no remaining payments on the account or until the total of all monthly exclusions on the account equals the member’s taxed contributions.
 
Box 5 of the 1099-R, sent annually to recipients of retirement benefits, reflects the total of all monthly exclusions applied to a recipient’s benefits for the year.

Income tax withholding

You have the right to choose whether you want federal income tax withheld from your retirement benefit payments. You may want to review your decision on withholdings periodically. From year to year, the amount of federal tax being withheld from your benefit payments (if any) may change due to changes in the withholding tables provided by the IRS. Your original withholding choice will remain in effect until you file new tax withholding forms with KRS. Complete Form 6017, Federal Income Tax Withholding Preference or change your withholdings online using our self service site. Your decision on income tax withholding is an important one, and you should discuss it with a qualified tax adviser.
 
The Tax Reform Act of 1986 requires automatic withholding from benefit checks if you are a U.S. citizen receiving your benefits in a foreign country. If you are not a U.S. citizen and are living in a foreign country, different income tax rules apply.

State income tax

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 excluded up to a certain amount. See Schedule P in the Kentucky Income Tax forms for the exclusion amount and calculation.  Retirement credit for unused sick leave is treated as being earned at the time of retirement.

Cost of living adjustments

All future COLAs to KRS recipients must be enacted by the General Assembly. The requirements for providing a COLA stipulate it may only be paid if the funding level in the particular system in which the COLA is being provided is greater than 100% and the COLA payment will not reduce the funding level below 100%, or if the legislature prefunds the COLA. It is possible for recipients of one KRS system to receive a COLA while recipients in another KRS system may not.
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