Schedule P is a Kentucky-specific tax form used to claim pension income exclusions. This form is designed for residents of Kentucky who receive retirement income from federal, Kentucky state, or local government pension plans. It is also applicable for those who have pension income related to supplemental U.S. Railroad Retirement Board benefits. The main purpose of Schedule P is to exclude a portion of taxable pension income, particularly for individuals whose retirement income is derived from service credit earned before January 1, 1998. Additionally, it helps retirees exclude some portion of their income based on a calculated exempt percentage, thus reducing the taxable amount. This form should be filed with your Kentucky state income tax return, whether you’re submitting Form 740, Form 740-NP, or Form 741. The exclusion applies to a variety of pension-related income, including annuities, IRAs, and deferred compensation plans, ensuring that only a portion of the income is taxed. In this guide, we will walk through the steps needed to file and complete Schedule P, providing you with line-by-line instructions to ensure accuracy and compliance.
How to File Schedule P (Kentucky Form 740, 740-NP, 741)?
To file Schedule P, you’ll need to include it with your Kentucky tax return (Form 740, 740-NP, or 741). This form is specifically for individuals who have pension income and want to apply the pension income exclusion. You do not need to file Schedule P if your taxable pension income exceeds $31,110. If your income is less than this threshold, you can complete the form to exclude some of your pension income based on the exempt percentage.
How to Complete Schedule P (Kentucky Form 740, 740-NP, 741)
Part I — Exempt Retirement Income (Do Not Include Income From Deferred Compensation Plans)
- Line 1(a): Enter the total amount of federally taxable pension income you received from federal, Kentucky state, or Kentucky local government sources if your retirement date is before January 1, 1998. This should be reported on your federal Form 1040 or 1040-SR, line 5(b). This amount is fully exempt from Kentucky taxes.
- Line 1(b): If your retirement date is after December 31, 1997, calculate the taxable pension income attributable to service credits earned before January 1, 1998. You’ll need to calculate the exempt percentage based on your pension provider’s records. Once you’ve determined the exempt percentage, multiply your taxable pension amount by this percentage. Report the result here.
- Line 1(c): Add the amounts from Line 1(a) and Line 1(b). This is the total amount of exempt retirement income for the year, which will be excluded from your taxable income in Kentucky.
Part II — Other Retirement Income (Amounts Not Included in Line 1(c))
- Line 2: Enter the total of any taxable retirement income that was not included in Line 1(c) above. This includes additional retirement income reported on federal Form 1040, line 4(b) or 5(b), as well as other forms of disability retirement income or deferred compensation included on your federal return (Form 1040 or 1040-SR, line 1).
Part III — Total to Be Excluded This Year
- Line 3: Enter the lesser of the amount reported on Line 2 or the maximum exclusion amount of $31,110. If your taxable pension income is below this threshold, the amount on Line 3 will be the total amount you can exclude this year.
- Line 4: Add the amounts from Line 1(c) and Line 3. This total is the sum of your exempt retirement income and other excluded income. Enter this amount on Schedule M, Line 9 (Form 740-NP, page 4, Line 10(b), or Form 741, Line 11).
If you’re filing jointly, combine the totals from lines 4(a) and 4(b) for both spouses and report the result on the appropriate form.
Special Instructions for Form 4972-K Filers
If you have a lump-sum distribution reported on Form 4972-K, and Line 3 is less than $31,110, you must enter the amount from Line 3 on Form 4972-K, Part II, Line 2.