Kentucky Income Tax Exemption for Active Duty Military Pay

Kentucky does not tax active duty military pay. The exemption is in KRS 141.019(1)(l), took effect for tax years beginning on or after January 1, 2010, and reaches every Kentucky servicemember regardless of where they are stationed. The definitions in KRS 141.175 are broader than most states', and the breadth is the point. "Armed Forces" means the military forces of the United States and of the Commonwealth, and the statute lists the Army, Navy, Air Force, Marine Corps, Coast Guard, National Guard, and any Reserve branch. "Active duty" runs from the day you assemble at your armory or other designated place until the day you return and are properly relieved, counts fractional days as full days, and expressly includes all days of active duty for training and inactive duty training. Read that last clause carefully, because it is the sentence that matters to the largest number of people. Inactive duty training is drill. A Kentucky National Guard or Reserve member's weekend drill pay and annual training pay are exempt from Kentucky income tax. Many guides describe this benefit as covering "active duty servicemembers," which reads as excluding the drilling reservist. It does not. Two practical consequences. Kentucky income tax is not required to be withheld from active duty pay. If your only income is active duty military compensation, you are not required to file a Kentucky return at all. The single exception is that you must file to recover tax that was wrongly withheld, and Revenue will refund withholding taken after 2009 in error. Residency does not lapse by being stationed elsewhere. If Kentucky is your state of legal residence with the military you remain a Kentucky resident for income tax purposes and file Form 740, and the exemption still applies. Full-year residents subtract the pay on Schedule M. Part-year residents subtract it on Form 740-NP under Adjustments to Income, labelled "active duty military pay." Combat zone service extends the deadline rather than changing the tax. A member serving in a presidentially designated combat zone is not required to file or pay until twelve months after the service is completed, and Guard and Reserve members called to active duty in a combat zone get the same extension. A nonresident military spouse in Kentucky under the Military Spouses Residency Relief Act is a separate matter with a trap in it. The spouse's income is exempt only if the servicemember is present in Kentucky on military orders, the spouse is in Kentucky solely to be with them, and the spouse maintains residence in another state which is the same state of residence as the servicemember. Revenue's own example makes the failure mode concrete: a servicemember domiciled in Florida whose spouse was never a Florida resident before the move does not qualify, and that spouse is taxed as a full-year Kentucky resident. The shared domicile has to predate the move. File Form K-4 with the employer to stop withholding, and Form 740-NP with the Military Spouse box checked to recover what was already taken.