Kentucky residents are required to report all income received including income from sources outside Kentucky. Within certain limitations, a credit for income tax paid to another state may be claimed. The credit is limited to the amount of Kentucky tax savings had the income reported to the other state been omitted, or the amount of tax paid to the other state, whichever is less.
You may not claim credit for tax withheld by another state. You must file a return with the other state and pay tax on income also taxed by Kentucky in order to claim the credit. A copy of the other state's return including a schedule of income sources must be attached to verify this credit. If you owe tax in more than one state, the credit for each state must be computed separately.
Kentucky has reciprocal agreements with specific states. These agreements provide for taxpayers to be taxed by their state of residence, and not the state where income is earned. Persons who live in Kentucky for more than 183 days during the tax year are considered residents and reciprocity does not apply. The states and types of exemptions are as follows:
- Illinois, West Virginia - wages and salaries
- Indiana - wages, salaries and commissions
- Michigan, Wisconsin - income from personal services (including salaries and wages)
- Ohio - wages and salaries. Note: Wages in which an S corporation pays to a shareholder-employee if the shareholder-employee is a 20% or greater direct or indirect equity investor in the S corporation shall not be exempt under the reciprocity agreement.
- Virginia - commuting daily, salary and wages
Kentucky does not allow a credit for tax paid to a reciprocal state on the above income. If tax was withheld by a reciprocal state, you must file directly with the other state for a refund of those taxes.
**TaxSlayer will automatically calculate this credit for your Resident Kentucky return if you have a Nonresident return created in your account. If the other state return is a Part-Year return, you will be required to manually enter the information requested in the state return.**