As of late April, Kentucky is now considered to be conformed to the federal tax reform provisions contained in the Tax Cuts and Jobs Act (TCJA) with the recent passing of House Bill (HB) 487, a significant tax reform legislation.
There are many changes and over the next few days, we will be sharing important information on our blog that details these updates and what it means regarding individual changes, sales tax changes, and other changes.
What You Need To Know About Kentucky Tax Reform HB 487
A few months ago, Kentucky pushed forward on HB 487 without the signature of Governor Bevin. The bill updates the Internal Revenue Code (IRC) conformity date, imposes a flat tax rate, creates mandatory unitary combined reporting, enacts single sales factor apportionment for most taxpayers, and adopts market-based sourcing for sales other than sales of tangible personal property. It also includes major sales and use tax provisions that expand the tax base to include a variety of services.
What does the above mean in layman’s terms though? HB 487 changes the way Kentucky individuals and businesses are taxed. For example, Kentucky is now imposing corporate and individual income taxes at a flat rate of 5%. Below, we detail the changes this bill creates for individual taxpayers in Kentucky.
HB 487 Updates On Individual Income Tax
Individual taxes in Kentucky are conformed to the TCJA except in the areas of increased expensing and depreciation for capital improvements and a 20% deduction related to pass-through income to individuals (199A). All of the following changes are applied to tax years beginning on or after January 1, 2018.
The $10 personal credit per person has been repealed and the only itemized deductions that remain are mortgage interest and charitable contributions. All other itemized deductions – cost of medical insurance, medical and dental care expenses, local employment taxes and property taxes paid, interest expense on investments, casualty and theft losses etc – are eliminated. Additionally, long-term care and health insurance premium deductions from Kentucky adjusted gross income are no longer allowed.
What can be claimed as deductions include the following:
- Home mortgage interest, points, and qualified mortgage insurance premiums
- Charitable contributions
- Miscellaneous deductions like
- Amortizable premium on taxable bonds
- Federal estate tax on income in respect of a decedent
- Repayments of more than $3,000 under a claim of right
- Unrecovered investment in an annuity
- Loss from other activities from Schedule K-1
Lastly, individual retirement income in excess of $31,110 (a $10,000 reduction from previous tax years) cannot be subtracted from a Kentucky taxpayer’s federal income tax base.