General Information

Electronic Filing Computer-Generated Refund Inquiries ( Returns Kentucky, in cooperation with the Inter- The Automated Refund and Tax Infor- nal Revenue Service, offers joint federal/ mation System (ARTIS) is a touch-tone state filing of individual income tax Many computer-generated telephone system designed to provide returns. Electronic filing is the fastest, forms are acceptable for fil- information about your individual most accurate way to file your return. ing your Kentucky individual income tax return. Information about Your federal and state returns must be income tax return. Check to electronically filed returns and returns filed at the same time. A Kentucky return be sure your software gen- using the preprinted bar-coded labels cannot be filed electronically unless it is erates an acceptable form. should be available within 72 hours of filed at the same time as the federal A list of vendors whose software has receipt. Information about refund re- return. been approved is posted on the Internet quest returns filed without the pre- at http://revenue.state.ky.us. printed bar-coded labels will be Why should you file your tax return available after the return has completed electronically? initial processing (approximately six to • You get an acknowledgment that the 12 weeks). return has been received. • You get a more accurate return due The ARTIS number is (502) 564-1600. It to software edits. Where to is available 24 hours a day, 7 days a • You get a faster refund. Refunds Get Forms week. from electronically filed returns are generally processed within 21 days. • You can use direct deposit to receive Important: Use only forms printed by the your refund. Direct deposit is avail- Revenue Cabinet or an approved com- able only to electronic filers. puter-generated version of this year’s Need a Copy of income tax forms since data must be 4 How can you file your tax return placed in specific areas on the return to Your Tax Return? electronically? be read correctly. Use of photocopies or faxed copies may cause delays in the If you need a copy of your tax return, you • Use an authorized electronic filer. processing of the return. must send your request in writing to: This includes paid preparers, Kentucky Revenue Cabinet, Taxpayer accountants, CPAs or volunteer Assistance Section, P.O. Box 181, Station groups that have been approved Forms and instructions are available at 56, Frankfort, KY 40602-0181. Please in- by the IRS to transmit returns some libraries, post offices, courthouses, clude your name(s) as it appeared on electronically. banks and all Kentucky Taxpayer Service your return, Social Security number(s), • File your return online. Returns may Centers. They may also be obtained by and your complete mailing address. To be filed using software that is writing FORMS, Revenue Cabinet, Frank- ensure confidentiality, all requests must purchased and installed on a per- fort, KY 40620, or by calling (502) 564- include your signature. sonal computer or by using a prod- 3658. Forms can be downloaded from uct that is accessed through the http://revenue.state.ky.us. Forms are Internet. A list of approved software also available by fax through the Rev- is posted on the Internet at http:// enue Cabinet’s fax-on-demand system, revenue.state.ky.us. TaxFax, at (502) 564-4459. • Use TeleFile. To use the TeleFile sys- How Long Should tem you must have received both a Records be Kept? federal and state TeleFile package through the mail. TeleFile is cur- rently limited to taxpayers that are Keep a copy of your tax return, eligible to file an EZ return. Address Change worksheets and records of all items appearing on it (such as When can you file your tax return Forms W-2 and 1099) until the If you move after you file, electronically? always notify the Kentucky statute of limitations runs out • You can file your return electroni- Revenue Cabinet of your new + for that return. Usually, this is cally beginning January 11, 2002. address. This can be done by four years from the date the • Payments on tax due returns filed sending a change of address card return was due or filed (with extensions), electronically are not due until April (available at your local post office) to: or the date the tax was paid, whichever 15, 2002. Kentucky Revenue Cabinet, Taxpayer is later. You should keep some records • Electronic returns will be accepted Assistance Section, P.O. Box 181, Station longer. For example, keep property until October 15, 2002. Returns filed 56, Frankfort, KY 40602-0181. Notifica- records (including those on your home) after April 15, 2002 are subject to the tion can also be made to any Kentucky as long as they are needed to figure the same penalties and interest as paper Taxpayer Service Center. A list of loca- basis of the original or replacement returns. tions is included in your packet. property.

1 Filing as an Injured 3 Income Tax Withholding Kentucky Education Spouse on Your and Estimated Savings Plan Trust Federal Form 1040? 3 Payments for 2002 The Kentucky Education Savings Plan Trust can help families save, in a planned Income tax refunds may be withheld by If the amount you owe or the amount way, for a child’s higher education. A trust the Cabinet if you owe money to the you overpaid is large, you may want to account can be opened for a beneficiary Kentucky Revenue Cabinet, another file a new Form K-4 with your employer of any age; and the account owner deter- state agency or the Internal Revenue to change the amount of income tax mines the method, schedule, and amount Service. withheld from your 2002 pay. In general, of contributions. Participant contributions you do not have to make estimated tax are not tax deductible for either Kentucky Kentucky does not recognize the federal payments if you expect that your 2002 or federal income tax purposes but tax on injured spouse form. Kentucky law re- Form 740 will show a tax refund or a investment income earned is deferred quires the offset of the entire refund if a tax balance due of $500 or less. If your until distribution. Investment income joint return is filed. If spouses want to total estimated tax for 2002 is more than earned on contribu- keep their tax liabilities and/or refunds $500 you may need to file Form 740-ES tions paid by any par- separate, each must file a separate tax and make estimated tax payments. ticipant and used for form. If you choose to file separately on Form 42A740-S4 includes a worksheet qualified higher educa- a combined return, for agencies other that you can use to see if you have to tion costs is not subject than the Revenue Cabinet the refund make estimated tax payments. to Kentucky income will be apportioned between spouses, tax (KRS 164A.370). based on each spouse’s income. The in- Also exempt are refunds of earnings due debted spouse’s refund will then be paid Return Adjustments to the trust beneficiary’s death, permanent to the appropriate agency. disability, or mental incapacity; or the trust beneficiary’s receipt of a scholarship, an If the Revenue Cabinet adjusts your educational assistance allowance, or other return and you do not understand the tax-exempt payment for educational adjustment, you may write to Tax- expenses (KRS 164A.350(7)(a); KRS payer Assistance, Revenue Cabinet, P.O. Death of a Taxpayer 164A.350(7)(b)). Effective July 14, 2000, re- Box 1190, Frankfort, KY 40602-1190 or funds of earnings that are not used for call (502) 564-4581. If you disagree with If a taxpayer died before filing a return qualified higher education costs or an adjustment made to your return, you for 2001, the taxpayer’s spouse or per- exempted under KRS 164A.350 are may appeal that adjustment by submit- sonal representative may have to file subject to Kentucky income tax. For ting a written protest within 45 days of and sign a return for that taxpayer. A additional information, call toll-free 1-877- notification. personal representative can be an ex- KY TRUST (1-877-598-7878) or visit ecutor, administrator or anyone who is www.kentuckytrust.org. in charge of the deceased taxpayer’s property. If the deceased taxpayer did Amended Returns not have to file a return but had tax with- held, a return must be filed to get a If you discover that you omitted deduc- Confidentiality refund. The person who files the return tions or otherwise improperly prepared Kentucky Revised Statute 131.190 should write “DECEASED,” the de- your return, you may obtain a refund by requires the Revenue Cabinet to main- ceased taxpayer’s name and the date of filing an amended return within four tain strict confidentiality of all taxpayer death across the top of the return. years of the due date of the original re- records. No employee of the Revenue turn. You are required to file an Cabinet may divulge any information If your spouse died in 2001 and you amended return to report omitted regarding the tax returns, schedules or did not remarry in 2001, you can file income. You may obtain Form 740-X by reports required to be filed. However, the jointly or separately on a combined contacting a Kentucky Taxpayer Service Revenue Cabinet is not prohibited from return. The return should show your Center or writing FORMS, Revenue providing evidence to or testifying in any spouse’s 2001 income before death Cabinet, Frankfort, KY 40620. and your income for all of 2001. You court of law concerning official tax can also file jointly or separately on a records. Also, Revenue Cabinet employ- combined return if your spouse died ees or any other person authorized to in 2002 before filing a 2001 return. Federal Audit access confidential state information are Write “Filing as surviving spouse” in Adjustments 3 prohibited from intentionally viewing the area where you sign the return. If such information without an official someone else is the personal repre- need to view. Taxpayers who have received a final sentative, he or she must also sign. determination of an Internal Revenue Further, the Cabinet may provide official Service audit must submit a copy to the information on a confidential basis to the Cabinet within 30 days of its Internal Revenue Service or to any other conclusion. The information should be governmental agency with which it has submitted to the Individual Government an exchange of information agreement Program Section, Revenue Cabinet, P.O. whereby the Cabinet shall receive simi- Box 1074, Frankfort, KY 40602-1074. lar or useful information in return.

2 FORMS 740, 740-S AND 740-EZ 2001 General Instructions

Who Must File a Kentucky Income Tax Return When and Where to File

APRIL 2002 If you were a Kentucky resident for the entire year, your The income tax return for calendar SMTWT F S filing requirement depends upon the amount of Kentucky year 2001 must be postmarked no 123456 adjusted gross income, age and whether you or your spouse later than April 15, 2002, to avoid pen- 7 8 910111213 14 15 16 17 18 19 20 are legally blind. You must file a return if: alties and interest. Mail to: 2115 22 23 24 25 26 27 28 29 30 YOUR FILING ADJUSTED GROSS Refund/Other Returns Pay Returns STATUS IS AND INCOME EXCEEDS Kentucky Revenue Cabinet Kentucky Revenue Cabinet Frankfort, KY 40618-0006 Frankfort, KY 40619-0008 Single Person—Under age 65 $5,000 Taxpayers who expect refunds should file as early as pos- Single Person— Age 65 or over or blind $5,000 sible to receive refunds promptly. If you have your tax return Single Person— Age 65 or over and blind $5,000 prepared by another person, you may wish to mail the return Husband and Wife—Both under age 65 $5,000 yourself in order to insure prompt filing. Husband and Wife—One 65 or over $5,000 Husband and Wife—Both age 65 or over $5,400 Envelopes Any person with gross receipts of $5,000 or more from self- employment must file a Form 740 regardless of the amount of adjusted gross income or the number of tax credits Use the blue envelope for refund returns. Use the claimed. yellow envelope for pay returns. Affix the label + marked for the envelope in the return address area In some cases part-time or part-year workers have income of the envelope you use. The size of the envelope has been taxes withheld from their paychecks. Even though the filing increased which means your return only needs to be folded requirements are not met, an income tax return must be in half. This reduces the thickness of the envelope and filed to claim a refund of the Kentucky taxes withheld. increases the efficiency of our mail opening equipment.

A child meeting the filing requirements must file a return even though being claimed as a dependent by the parent. How to Complete Forms 740, 740-S and 740-EZ Kentucky income tax law contains no special provisions for taxing the income of a minor child at the parent’s tax rates The large colored boxes on the forms will allow us to process nor the reporting of income of a child on the parent’s return. your refund claim faster and with fewer errors. It is important to follow the instructions below: Generally, all income of Kentucky residents, regardless of • Use only black ink to enter data. where it was earned, is subject to Kentucky income tax. • Send the original form. Do not send a photocopy. • Stay within the lines of each box. Nonresidents and part-year residents must report income • Print only one number or letter in each box. on Form 740-NP. • If a line does not apply to you, leave it blank. • Do not use dashes, lines, or other symbols in the boxes Military Personnel—Members of the Armed Forces are re- or in writing your numbers. quired to file state income tax returns with their state of • For negative amounts, enter a minus sign (–) in front of legal domicile, which usually is the state of residence prior the first box provided for your numbers. to entering military service. Persons serving outside of the • All entries must be rounded to the nearest whole dollar. United States are considered residents and are not exempt Amounts less than 50 cents should be rounded down. from taxes because of foreign assignments. Round amounts from 50 cents to 99 cents to the next higher dollar. Kentucky residents who are in the military are often granted Write your numbers like this: extensions for military service when serving outside the United States. Any extension granted for federal income tax purposes will be honored for Kentucky income tax pur- poses. Any income earned in a combat zone that is exempt Example: Enter $4,439.50 or $4,439.75 as: 4,440.00 for federal tax purposes is also exempt for Kentucky tax purposes. ,, .

3 Check the box that describes your filing status. If you Address Labels þ are married, filed a joint federal return and both you and your spouse had income, you may be able to reduce Use the preprinted, bar-coded labels provided. This will your tax by using Filing Status 2 rather than Filing Status 3. enable us to tell you that your return has been received and provide information about your refund once the return has Filing Status 1, Single—Use this filing status if you are un- been processed. If the address is married, divorced, widowed, legally separated by court PUBLIC JOHN Q incorrect, draw a line through the 1234 MAIN STREET decree, or if you filed as “Head of Household” or “Qualify- incorrect information and print the ANYTOWN KY 00000 ing Widow(er)” on your federal return. correct address. If the name is incorrect, discard the labels and print the requested Filing Status 2, Married Filing Separately on This Combined information in the blocks provided. The labels are for Return—Use this filing status to report your incomes indi- informational purposes only and do not increase your vidually but on only one tax form. You do this by filling in chances of being audited. Use of the labels speeds both Columns A and B. You may file separately on this processing and enhances accuracy. combined return regardless of whether you filed jointly or separately for federal purposes if both you and your spouse had income. This filing status usually results in a lower tax Social Security Numbers than Filing Status 3.

Each spouse must claim his or her own income and deduc- Enter the Social Security numbers of yourself and your tions. The total of Line 9, Columns A and B, must equal your spouse in the boxes at the top of the form. Labels mailed to federal adjusted gross income. you by the Kentucky Revenue Cabinet no longer contain this information. Filing Status 3, Married Filing Joint Return—Use this filing status if you and your spouse choose to file a joint return even if one spouse had no income. Jointly means that you Political Party Fund Designation and your spouse add your incomes together and report in Column B. You may designate $2 of your taxes to either the Demo- cratic or Republican party if you have a tax liability of at Filing Status 4, Married Filing Separate Returns—If using least $2 ($4 for married persons filing joint returns). Fifty this filing status, you and your spouse must file two sepa- cents will be paid to the corresponding rate tax forms. The husband’s income is reported on one political organization in your county of tax form, the wife’s on the other. When filing separate residence and the remainder will be paid returns, the name and Social Security number of each to the respective state political party. This spouse must be entered on both returns. Enter the spouse’s designation will not increase your tax or decrease your Social Security number in the block provided, and enter the refund. You may make this designation by checking the name on Line 4. applicable box. A husband and wife may each make a des- ignation. Persons making no designation should check the “No Designation” box. Tax Credits

Reporting Periods and Accounting Procedures Yourself—You are always allowed to claim a tax credit for yourself (even if your parent(s) can claim a credit for you Kentucky law requires taxpayers to report income on the on their return). There are five boxes under three separate same calendar or fiscal year and to use the same methods headings. Always check the box under “Check Regular” to of accounting as required for federal income tax purposes. claim a tax credit for yourself. If 65 or older, also check the Any federally approved change in accounting period or next two boxes on the line. If legally blind, also check the methods must be reported to the Kentucky Revenue Cabinet. last two boxes on the line. Attach a copy of the federal approval. Your Spouse—Do not claim credits for spouse if (1) you are single; (2) you are married and you and your spouse are Filing Status filing two separate returns; or (3) your spouse received more than half of his or her support from another taxpayer. How- Legal liabilities are affected by the choice of filing methods. ever, if your spouse died during the taxable year, you may Married persons who file joint or combined returns are claim a credit for the deceased. jointly and severally liable for all income taxes due for the period covered by the return. That is, each spouse may be Claim the credits for spouse if you are married and (1) you held legally responsible for payment of taxes on income and your spouse are filing a joint or combined return, or (2) earned by the other. If spouses want to credit the refund of if your spouse had no income or is not required to file a one against the liability of the other or combine their tax return. If you meet these criteria, check the first box for your liabilities or refunds, they must file a combined return. If spouse. If your spouse is 65 or older, also check the next spouses want to keep their tax liabilities and/or refunds two boxes. If your spouse was legally blind at the end of separate, each must file a separate tax form. the taxable year, also check the last two boxes.

4 Dependents—You are allowed to claim a tax credit for each person defined as a dependent in the Internal Revenue Code. Voluntary Refund Contributions Generally, dependents who qualify for federal purposes also qualify for Kentucky. Donations to the following funds are voluntary and amounts Use the appropriate line to claim tax credits for your de- donated will reduce your refund. You may contribute all or pendent children, including stepchildren and legally adopted a portion of your overpayment to one or more of the fol- children, who lived with you during the taxable year. lowing funds. Enter the amount you wish to contribute on the appropriate lines. Use the appropriate line to claim tax credits for your de- pendent children who did not live with you and to claim tax credits for other persons who qualify as dependents. Nature and Wildlife Fund—Contributions to this fund are used to acquire and manage Kentucky’s finest natural areas Children of Divorced or Separated Parents—Attach a copy as state nature preserves and to care for all wildlife not taken of federal Form 8332 filed with your federal return. by hunting or fishing. The Kentucky Department of Fish and Wildlife Resources and the Kentucky Tax Credits for Individuals Supported by More Than One State Nature Preserves Commission Taxpayer—Attach a copy of federal Form 2120 filed with work together to protect Kentucky’s rare your federal return. plants and animals; acquire the most precious and threatened forests, wet- Kentucky National Guard Members—Persons who were lands and prairies; and manage members of the Kentucky National Guard on December 31, Kentucky’s diverse wildlife. Your tax de- 2001, may claim an additional credit on Line 6. Designate ductible contributions play a critical role this credit with the initials “N.G.” Kentucky law specifically in protecting and managing the best examples of Kentucky’s restricts this credit to Kentucky National Guard members; natural environment for the future. Contributions may also military reserve members are not eligible. be made directly to the Nature and Wildlife Fund, 801 Schenkel Lane, Frankfort, KY 40601. Dividing the Credits—Each taxpayer must claim all of his or her own tax credits including the credits for age and blind- ness. Therefore, if married, each spouse must claim at least Child Victims’ Trust Fund—Contributions to this fund one credit. However, spouses may divide tax credits for finance local programs designed to prevent dependents, or one spouse may claim all dependent credits the sexual abuse and exploitation of chil- and the other none. dren. This fund is administered through the Attorney General’s Office and relies solely Example I—A husband who is 65 and a wife who is 60 are on the tax deductible contributions made by filing a combined return. The husband must claim three interested citizens. Contributions may also credits (one regular and two for being 65 or older), and the be made directly to the Child Victims’ Trust wife must claim one. Fund, c/o Kentucky Attorney General, Capitol Building, Frankfort, KY 40601. Example II—A husband and wife have two dependents. The husband must claim his regular credit, and the wife must claim hers. However, the two dependent credits may be Bluegrass State Games and U.S. Olympic Committee claimed by either spouse, or each spouse may claim one. Fund—Contributions to this fund provide Kentuckians a wholesome avenue for personal develop- ment through participation in the Blue- Kentucky Use Tax grass State Games and assist Kentucky’s Olympic hopefuls with the funding needed to train for the Olympic Games. See page 6 for information about the consumer use tax and Contributions may also be made directly a worksheet for calculating your use tax. to the Bluegrass State Games and U.S. Olympic Committee Fund, Office of the Governor, Capitol Building, Frankfort, KY 40601.

Veterans’ Program Trust Fund—Contribu- tions to this fund are administered by the Department of Veterans’ Affairs solely for the benefit of veterans’ programs. Con- tributions may also be made directly to Kentucky Department of Veterans’ Affairs, 1111 Louisville Road, Frankfort, KY 40601.

5 KENTUCKY USE TAX

Important Reminder from the Revenue Cabinet About Out-of-State Purchases

A 6 percent use tax may be due if you make out-of-state purchases for storage, use or other consumption in Kentucky and did not pay at least 6 percent state sales tax to the seller at the time of purchase. For example, if you order from catalogs, make purchases through the Internet, or shop outside Kentucky for items such as clothing, shoes, jewelry, cleaning supplies, furniture, computer equipment, software, office supplies, books, souvenirs, exercise equipment or subscribe to magazines, you may owe use tax to Kentucky. It is important to remember that use tax applies only to items purchased outside Kentucky, including another country, which would have been taxed if purchased in Kentucky.

Two options are available to report and pay use tax. (1) Form 51A113, Kentucky Consumer’s Use Tax Return, may be filed during the year each time you make taxable purchases; or (2) You can report and pay use tax on an annual basis at the same time you file your Kentucky individual income tax return. For your convenience, a Use Tax Calculation Worksheet is provided below.

Credit Against the Kentucky Use Tax Due

¨ You may reduce or eliminate the amount of Kentucky use tax due by the amount of state sales tax paid to the out-of-state seller. The reduction may not exceed the amount of Kentucky use tax due on the purchase. For example, if Georgia state sales tax of 4 percent is paid, only the additional 2 percent is due to Kentucky, or if Illinois state sales tax of 6.25 percent is paid, no additional Kentucky use tax is due.

¨ Sales tax paid to a city, county or country cannot be used as a credit against the Kentucky use tax due.

Use Tax Calculation Worksheet ✍ Need more information about use tax?

Visit our web site at: http://revenue.state.ky.us : Purchases Subject to Kentucky Use Tax ...... $ Call or write: Kentucky Revenue Cabinet Attention: Use Tax Multiply by .06 (6%) ...... x .06 P.O. Box 181, Station 53 Frankfort, KY 40602-0181 Use Tax ...... $ Monday—Friday 8 a.m.—4:30 p.m., ET (502) 564-5170 Report this amount on Form 740, Line 23; Form 740S, Line 19; or 740EZ, Line 7. Hearing or speech-impaired persons may call the TDD line at (502) 564-3058.

6 Interest at the “tax interest rate” applies to any income tax Penalties and Interest paid after the original due date of the return. If the amount of tax paid by the original due date is less than 75 percent If your return is filed after April 15, 2002, or any tax due on of the tax due, a late payment penalty may be assessed the return is paid after April 15, 2002, you may be subject to (minimum penalty is $10). additional penalties and interest. Interest and penalty charges can be avoided by sending a payment with your extension request by the due date. Interest—Interest will be assessed at the “tax interest rate” from the original due date of the return until the date of If you wish to make a payment prior to the due date of your payment. return when using the:

Late Payment Penalty—If the amount of tax due is not paid (1) Kentucky Extension—Complete Section II, Kentucky by the original due date of the return, a penalty of 2 percent Extension Payment Voucher, of the Application for of the tax computed due may be assessed for each 30 days Extension of Time to File, Form 40A102, and send with or fraction thereof that the tax is past due, not to exceed 20 payment. Write “KY Income Tax—2001” and your Social percent. The minimum penalty is $10. However, if the Security number(s) on the face of the check. amount timely paid is 75 percent of the tax determined due (2) Federal Automatic Extension—Make a copy of the lower by the Revenue Cabinet, no late payment penalty will be portion of the federal Application for Automatic Exten- assessed. sion, Form 4868, and send with payment. Write “KY Income Tax—2001” and your Social Security number(s) Late Filing Penalty—If a return is not filed by the due date or on the face of the check. the extended due date, a penalty of 2 percent of the total tax due for each 30 days or fraction thereof that a return is not filed may be assessed, not to exceed 20 percent. The mini- 2002 Estimated Tax Payments mum penalty is $10.

Note: Penalties but not interest may be reduced or waived if reasonable cause for reduction or waiver can be shown. Persons who reasonably expect to have income in excess of $5,000 from which no Kentucky income tax will be with- held may be required to make estimated tax payments on Form 740-ES. However, if the amount of estimated tax is Extension of Time to File $500 or less, no estimated payments are required. Persons who do not prepay at least 70 percent of the tax liability may be subject to a 10 percent penalty for underpayment Taxpayers who are unable to file a return by April 15 may of estimated tax. Prepayments for 2002 may be made request an extension. Inability to pay is not an acceptable through withholding, a credit forward of a 2001 overpay- reason. Acceptable reasons include, but are not limited to, ment or estimated tax installment payments. Married tax- destruction of records by fire or flood and serious illness of payers filing a combined return should make joint payments the taxpayer. The request for the extension must be sub- of estimated tax. Form 740-ES contains a worksheet for cal- mitted in writing to the Revenue Cabinet on or before the culating the amount of estimated tax due and instructions due date of the return. The request must state a reasonable for making installment payments. These may be obtained cause for the inability to file. Extensions are limited to six from the Revenue Cabinet, Frankfort, KY 40620, or any Ken- months. A copy of the Kentucky extension request must tucky Taxpayer Service Center. be attached to the return.

Individuals who receive a federal extension are not required to request a separate Kentucky extension. They can meet Personal Property Forms the requirements by attaching a copy of the application for automatic federal extension or the approved federal exten- Kentucky taxpayers are reminded to report taxable intan- sion to the Kentucky return. gible personal property; Kentucky business taxpayers are reminded to report all taxable personal property, except IRS extensions by e-file (by phone, personal computer, a motor vehicles, owned on January 1 to either the property tax professional or pay with credit card)—Attach a copy of valuation administrator in the county of residence (or loca- Form 4868 with the confirmation number in the lower tion of business) or the Department of Property Valuation right-hand corner of the form or a copy of the electronic in Frankfort. Intangible personal property is to be reported acknowledgment. on the Intangible Property Tax Return, Form 62A376, and tangible personal property is to be reported on the Tan- Kentucky residents who are in the military are often granted gible Personal Property Tax Return, Form 62A500. The due extensions for military service when serving outside the date for these returns is May 15. Do not mail these returns United States. Any extension granted for federal income with your income tax return; use a separate envelope. tax purposes will be honored for Kentucky income tax pur- poses. Any income earned in a combat zone that is exempt for federal tax purposes is also exempt for Kentucky tax purposes. +

7 2001 FEDERAL/KENTUCKY INDIVIDUAL INCOME TAX DIFFERENCES

Kentucky income tax law is based on the federal income tax The chart below provides a quick reference guide to the major law in effect on December 31, 1999. The Revenue Cabinet federal/Kentucky differences. It is not intended to be all generally follows the administrative regulations and rulings inclusive. Items not listed may be referred to the Revenue of the Internal Revenue Service in those areas where no spe- Cabinet to determine Kentucky tax treatment. cific Kentucky law exists.

FEDERAL KENTUCKY PROVISION TAX TREATMENT TAX TREATMENT

1. Interest from Federal Obligations Taxable Exempt 2. Retirement Income from: Partially exempt if retired Commonwealth of Kentucky Retirement Systems Taxable after December 31, 1997; exempt if retired before Kentucky Local Government Retirement Systems Taxable January 1, 1998; Schedule P may be required Federal and Military Retirement Systems Taxable 3. Pensions and Annuities Starting After 7/1/86 3-year recovery rule eliminated 3-year recovery rule retained and Before 1/1/90 4. Other Pension and Annuity Income Taxable 100% excludable up to $37,500; Schedule P may be required 5. Benefits from U.S. Railroad Retirement Board May be taxable Exempt; Schedule P may be required 6. Social Security Benefits May be taxable Exempt 7. Capital Gains on Sale of Kentucky Turnpike Bonds Taxable Exempt 8. Other States’ Municipal Bond Interest Income Exempt Taxable 9. Kentucky Local Government Lease Interest Payments Taxable Exempt 10. Long-Term Care Insurance Premiums Limited deduction as self-employed 100% adjustment to gross health insurance income 11. Medical and Dental Insurance Premiums Limited deduction as self-employed 100% adjustment to gross health insurance income 12. Capital Gains on Property Taken by Taxable Exempt Eminent Domain 13. Election Workers—Income for Training or Taxable Exempt Working at Election Booths 14. Artistic Contributions Noncash contribution allowed as Appraised value allowed as itemized deduction itemized deduction or adjustment to income 15. State Income Taxes Deductible Nondeductible 16. Leasehold Interest—Charitable Contribution May be deductible Deductible; Schedule HH required 17. Kentucky Unemployment Tax Credit No credit allowed $100 per certified employee; Schedule UTC required 18. Work Opportunity Credit (federal Form 5884) Tax credit allowed; wage expense No credit allowed; entire wage reduced by amount of credit expense is deductible 19. Welfare to Work Credit (federal Form 8861) Tax credit allowed; wage expense No credit allowed; wage expense reduced by amount of credit reduced by amount of federal credit 20. Child and Dependent Care Credit Tax credit based on expenses 20% of federal credit 21. Low Income Credit No credit allowed Decreasing tax credit allowed 22. Recycling and/or Composting Equipment Tax Credit No credit allowed Tax credit allowed; Schedule RC or RC(K-1) required 23. Taxpayer who may be Claimed as Dependent May not claim self May claim self on Another’s Return (i.e., full-time student) 24. Child’s Income Reported by Parent Permitted; taxed at parent’s rate Not permitted 25. National Tobacco Settlement and TLAP Income Taxable Exempt 26. Skills Training Investment Tax Credit No credit allowed Tax credit allowed; Schedule TC required 27. Kentucky Investment Fund Tax Credit No credit allowed Tax credit allowed; Schedule TC required 28. Employer GED Incentive Tax Credit No credit allowed Tax credit allowed; Schedule TC required

8 COMPLETING FORM 740-S Line-By-Line Instructions

Who May Use Form 740-S—Form 740-S may be used by full- FORM 740-S LINE-BY-LINE INSTRUCTIONS year Kentucky residents: Line 9, Adjusted Gross Income—Enter the total amount ü 4 with income primarily from wages, salaries, tips, unem- of your federal adjusted gross income from your fed- ployment compensation, taxable scholarship or fellow- eral income tax return in Column B if Filing Status 1, 3 or 4 is ship grants, interest and dividends; used. Use Column A only when entering your spouse’s in- ü who do not itemize deductions; and come on a combined return (Filing Status 2). When using Filing Status 2, Columns A and B, Line 9, must equal your ü who do not have federal/Kentucky income differences. federal adjusted gross income. Each spouse must claim his or her own income and deductions. (Do not confuse federal You must file Form 740 if you have income from business, adjusted gross income with federal taxable income shown farming, rental property, capital gains or losses, retirement on the federal return.) sources; or itemize deductions.

APRIL 2002 Line 10, Standard Deduction—You are allowed a standard When and Where to File—The SMTWT F S deduction of $1,750. (If filing a joint return, only $1,750 in 2001 Form 740-S must be post- 123456 7 8 910111213 Column B is allowed.) marked no later than April 15, 2002, 14 15 16 17 18 19 20 to avoid penalties and interest. 2115 22 23 24 25 26 27 28 29 30 5 Lines 12 and 13—Compute your tax using the tax table or the following simplified tax rate schedule. Mail to: If taxable income is: Tax before credit is: Refund/Other Returns Pay Returns Kentucky Revenue Cabinet Kentucky Revenue Cabinet $ 0 — $2,999 ...... 2% of taxable income Frankfort, KY 40618-0006 Frankfort, KY 40619-0008 $3,000 — $3,999 ...... 3% of taxable income minus $30 COMPLETING FORM 740-S—For more information, see the General Instructions. $4,000 — $4,999 ...... 4% of taxable income minus $70

1 SSN Needed—You must enter your Social Security $5,000 — $7,999 ...... 5% of taxable income minus $120 number (SSN) on the return. Social Security numbers are not printed on the peel-off labels mailed by the Revenue $8,000 and up ...... 6% of taxable income minus $200 Cabinet. If you are married filing a joint return or separately on a combined return, make sure that you enter the names Deduct $20 for each tax credit claimed from the amount com- and SSNs in the same order each year. puted above. Each spouse must claim all of his or her own TIP—For the first person (yourself) listed on the return, credits. Therefore, each spouse must claim at least one use SSN boxes labeled B to enter your SSN. For the credit. Credits for dependents may be divided between the Ü second person (spouse) listed on the return, use SSN spouses, or one spouse may claim all the credits for depen- boxes labeled A to enter your spouse’s SSN. dents and the other none. This is your tax liability. Your tax cannot be less than zero. Please use the Address Labels—These labels contain name and address information. For corrections to the label, see Example: (Taxable income) $8,500 x 6% – $200 = General Instructions on page 4. $310 – $20 (tax credit) = $290

2 Political Party Fund Designation—You may designate Line 15, Low Income Tax Credit—A low income tax credit is $2 of your taxes to either the Democratic or Republi- allowed to single persons and married couples whose com- can party if you have a tax liability of at least $2 ($4 for married bined Kentucky adjusted gross income, Line 9, is not over persons filing joint returns). $25,000. Complete the following worksheet to determine your low income tax credit. Filing Status—Legal liabilities are affected by the choice of filing methods. Married taxpayers may elect Filing Status 2 Caution: Married couples who file separate returns or sepa- or 4, even if you filed a joint return for federal tax purposes. rately on a combined return—If you are married and living with your spouse, you must add your and your spouse's 3 Tax Credits—You are always allowed to claim a tax Kentucky adjusted gross income together to find the correct credit for yourself (even if your parent(s) can claim a low income tax credit percentage. If the total is greater than credit for you on their return). $25,000, you do not qualify for this credit.

9 If the amount Enter decimal amount Line 22—If the amount on Line 21 (Kentucky Tax Withheld) on line c below is: on line e is more than the amount on Line 20 (Total Tax Liability), you over but not over have an overpayment and are due a refund. Subtract Line 20 --- $ 5,000 1.00 (100%) from Line 21, and enter the difference on Line 22 as an over- $ 5,000 $10,000 .50 ( 50%) payment. If your Total Tax Liability on Line 20 is larger than $10,000 $15,000 .25 ( 25%) $15,000 $20,000 .15 ( 15%) Line 21, you owe additional tax. Subtract Line 21 from Line $20,000 $25,000 .05 ( 5%) 20 and enter the difference on Line 26. a. Enter the amount from Column B, Line 23—If you show an overpayment on Line 22, you may Line 9, but not less than zero. contribute to any or all of the funds listed. b. Enter the amount from Column A, + Line 9, but not less than zero. Enter the amount(s) you wish to contribute on Lines 23(a), (If you are using Filing Status 4, enter the amount from Column B, 23(b), 23(c) and/or 23(d). The total of these amounts cannot Line 9, of your spouse’s separate exceed the amount of the overpayment. return.) c. Add Lines a and b. Line 24—Add amounts on Lines 23(a), 23(b), 23(c) and 23(d). If over $25,000, you do not qualify for this tax credit. Do not complete the worksheet; skip Line 15. Line 25—Subtract the amount of donations, if any, on Line Computation of Low Income Tax Credit 24 from the amount of the overpayment on Line 22. Enter d. Enter tax amount from Line 14. the difference on Line 25. This is the amount of your refund. e. Enter decimal amount from table If all of the overpayment is donated, enter zero on Line 25. above that applies to adjusted x gross income on Line c. Line 26, Additional Tax Due—Subtract Line 21 from f. Multiply amount on Line d by 6 decimal amount on Line e. Line 20 and enter the difference on Line 26. This is your Enter result on Line 15. This is additional tax due before penalties and interest. your Low Income Tax Credit. Line 27(a), Underpayment of Estimated Tax Penalty—If the LINE 17, Child and Dependent Care Credit—Enter in the amount owed is more than 30 percent of the income tax space provided the amount of credit calculated on federal liability on Line 18, you may be subject to an underpayment Form 2441, Line 9 (or Form 1040A, Schedule 2, Line 9), for of estimated tax penalty. The amount of the penalty may be child and dependent care expenses. Multiply this amount calculated on Form 2210-K. If at least $500 of additional tax by 20 percent (.20), and enter result on Line 17. is due, you may be required to make estimated tax payments during 2002. If you do not meet the filing requirements to file a federal income tax return but would have been entitled to the fed- Line 27(b), (c) and (d), Interest and Penalties—File your return eral child and dependent care credit, you may claim the child and pay any additional tax due by April 15, 2002, to avoid and dependent care credit for Kentucky purposes. Complete interest and penalties. See the General Instructions or con- and attach federal Form 2441, state on the form “did not tact the Revenue Cabinet for additional information. meet federal filing requirements” and follow instructions for Line 17. Note: Penalties but not interest may be reduced or waived if reasonable cause for reduction or waiver can be shown. Line 19, Tax on Out-of-State Purchases (Use Tax)—If, during the year, you made any purchases out of state of tangible Line 28, Amount You Owe—You must pay any tax due shown personal property for use in Kentucky on which sales tax on Line 28. Make check payable to Kentucky State Treasurer, was not charged, you must report Kentucky use tax on those and attach it to your return. On the face of the check please purchases, pursuant to KRS 139.330. Multiply total purchase write “KY Income Tax—2001” and your Social Security price by .06 and enter on Line 19. (See worksheet on page 6.) number(s).

Line 21, Kentucky Tax Withheld—Enter the amount of Ken- 7 2002 Income Tax Booklet—Check the appropriate box tucky income tax withheld as shown on your 2001 wage and to indicate whether you wish to receive only labels or tax statements. These statements must be attached to your a complete booklet of tax forms for the preparation of your return. Make sure you file the copy designated to be filed 2002 income tax return. with your state return. Do not include amounts withheld by your employer for other states, city or local government 8 Signature—Each return must be properly signed by the occupational, license or income taxes. File a return with the taxpayer. Joint and combined returns must be signed other state to claim credit for the other state's tax withholding. by both husband and wife.

10 COMPLETING FORM 740 Line-By-Line Instructions

Each spouse must claim his or her own income and deduc- Who Must Use Form 740? tions. The total of Line 9, Columns A and B, must equal your federal adjusted gross income.

Full-year Kentucky residents who: LINE 3, Married Filing Joint Return—Use this filing status if ü have farm, business, rental and/or capital gain income or you and your spouse choose to file a joint return even if losses one spouse had no income. Jointly means that you and your ü itemize deductions spouse add your incomes together and report in Column B. ü have additions to or subtractions from federal adjusted LINE 4, Married Filing Separate Returns—If using this filing gross income (see instructions) status, you and your spouse must file two separate tax forms. ü report on an accrual basis The husband’s income is reported on one tax form, the wife’s ü claim Kentucky estimated tax payments on the other. When filing separate returns, the name and ü have pension income Social Security number of each spouse must be entered on both returns. Enter the spouse’s Social Security number in Complete your federal tax return first. If you are not required the block provided, and enter the name on Line 4. to file a federal tax return, see instructions for Line 9.

For Fiscal Year Filers Only—Most people pay taxes for a calendar year. However, if you file for a taxable year other Personal Credits than a calendar year or for part of a year, enter the begin- ning and ending dates of that year on the line at the top of LINE 5, Tax Credits the form. Line 5(a), Yourself—You are always allowed to claim a tax credit for yourself (even if your parent(s) can claim a credit Social Security Number for you on their return). On Line 5(a), there are five boxes under three separate headings. Always check the box under “Check Regular” to claim a tax credit for yourself. If 65 or SSN Needed—You must enter your Social Security number older, also check the next two boxes on the line. If legally (SSN) on the return. Social Security numbers are not printed blind, also check the last two boxes on the line. on the peel-off labels mailed by the Revenue Cabinet. If you are married filing a joint return or separately on a combined Line 5(b), Your Spouse—Do not fill in Line 5(b) if (1) you are return, make sure that you enter the names and SSNs in the single; (2) you are married and you and your spouse are same order each year. filing two separate returns; or (3) your spouse received more than half of his or her support from another taxpayer. How- TIP—For the first person (yourself) listed on the return, ever, if your spouse died during the taxable year, you may use SSN boxes labeled B to enter your SSN. For the claim a credit for the deceased on Line 5(b). Ü second person (spouse) listed on the return, use SSN boxes labeled A to enter your spouse’s SSN. Fill in Line 5(b) if you are married and (1) you and your spouse are filing a joint or combined return, or (2) if your spouse had no income or is not required to file a return. If you meet Filing Status these criteria, check the first box on Line 5(b) for your spouse. If your spouse is 65 or older, also check the next two boxes. If your spouse was legally blind at the end of the taxable LINE 1, Single—Use this filing status if you are unmarried, year, also check the last two boxes on Line 5(b). divorced, widowed, legally separated by court decree, or if Dependents—You are allowed to claim a tax credit for each you filed as “Head of Household” or “Qualifying Widow(er)” person defined as a dependent in the Internal Revenue Code. on your federal return. Generally, dependents who qualify for federal purposes also LINE 2, Married Filing Separately on This Combined qualify for Kentucky. Return—Use this filing status to report your incomes indi- Line 6—Use to claim tax credits for your dependent chil- vidually but on only one tax form. You do this by filling in dren, including stepchildren and legally adopted children, both Columns A and B. You may file separately on this who lived with you during the taxable year. combined return regardless of whether you filed jointly or separately for federal purposes if both you and your spouse Line 7—Use to claim tax credits for your dependent chil- had income. This filing status usually results in a lower tax dren who did not live with you and to claim tax credits for than Filing Status 3. other persons who qualify as dependents.

11 Adjusted Gross Income Tax

LINE 9, Federal Adjusted Gross Income LINE 16—Determining Your Tax

Enter the total amount of your federal adjusted gross in- Tax Table or Computation—An optional tax table has been come from your federal income tax return in Column B if prepared for your convenience. You may use this table Filing Status 1, 3 or 4 is used. Use Column A only when whether or not you itemize. Married taxpayers filing sepa- entering your spouse’s income on a combined return (Fil- rately on a combined return may use the tax table or the tax ing Status 2). When using Filing Status 2, Columns A and B, rate schedule, or one spouse may use the tax table and the Line 9, must equal your federal adjusted gross income. (Do other the tax rate schedule. If you choose not to use the tax not confuse federal adjusted gross income with federal tax- table, compute your tax using the tax rate schedule below. able income shown on the federal return.) If you use the tax table and you are claiming more than six Where husband and wife have filed a joint return for fed- tax credits, determine the tax from the table on your income eral income tax purposes and have not elected to file a joint using six tax credits. Then subtract $20 from this figure for Kentucky income tax return, each spouse must claim his or each tax credit in excess of six. her own income and deductions. For married taxpayers, each spouse must claim all of his or If you are not required to file a federal income tax return, her own credits. Therefore, each spouse must claim at least enter on Line 9 the total of wages, salaries, tips, fees, com- one credit. Credits for dependents may be divided between missions, bonuses, other payments for personal services, the spouses, or one spouse may claim all the credits for taxable scholarships and fellowships, taxable interest and dependents and the other none. dividends, trade or business income, unemployment com- pensation and all other income from sources within and Tax Rate Schedule without Kentucky including amounts not reported on attached wage and tax statements. If you have income not If taxable amount is: Tax is: supported by a wage and tax statement, attach a support- $3,000 or less ...... 2% of taxable amount ing schedule showing the source and amount. over $3,000 Determining Kentucky Adjusted Gross Income—Kentucky but not over $4,000 .... $60 plus 3% of amount over $3,000 law requires that the individual income tax return begin with over $4,000 federal adjusted gross income and be adjusted for any dif- but not over $5,000 .... $90 plus 4% of amount over $4,000 ferences to arrive at Kentucky adjusted gross income. Sched- over $5,000 ule M is designed to make “additions to” federal adjusted but not over $8,000 .... $130 plus 5% of amount over $5,000 gross income and provides for “subtractions from” federal over $8,000 ...... $280 plus 6% of amount over $8,000 adjusted gross income. For a list of differences, see the Federal/Kentucky Individual Income Tax Differences chart Deduct $20 for each tax credit claimed from the amount and the line-by-line instructions. computed using the tax rate schedule above. If this compu- tation results in an amount less than zero, enter zero in the LINE 10—Additions to Federal Adjusted Gross Income— appropriate column on Line 16. Enter amount from Schedule M, Part I, line 5. The Kentucky Revenue Cabinet has provided a simplified LINE 12—Subtractions from Federal Adjusted Gross tax rate schedule in the line-by-line instructions for Forms Income—Enter amount from Schedule M, Part II, line 14. 740-EZ and 740-S.

LINE 13—Kentucky Adjusted Gross Income—Subtract Line 12 from Line 11. This is your Kentucky Adjusted Gross Schedule TC—Lump-sum Distribution and Income. Special Nonrefundable Tax Credits

Taxable Income You must file Schedule TC if: ü you received a lump-sum distribution and compute your tax on Form 4972-K; LINE 14, Deductions—Itemizers, complete Schedule A and ü enter on Line 14. If one spouse itemizes deductions, the other you are a farmer and elect to income average; or must itemize. See specific instructions for Schedule A. ü you claim any of the nonrefundable tax credits listed below. Nonitemizers, enter the standard deduction of $1,750. If mar- ried filing separately on a combined return, enter $1,750 in Lump-sum Distribution—Special 10–Year Averaging— both Columns A and B. If filing a joint return, only one $1,750 Kentucky allows a special 10-year averaging method for standard deduction is allowed. determining tax on lump-sum distributions received from certain retirement plans that qualify for federal 10-year LINE 15—Subtract Line 14 from Line 13. This is your Tax- averaging. If this special method is used for federal able Income. purposes, Form 4972-K, Kentucky Tax on Lump-Sum

12 Distributions, and Schedule P, Pension Income Exclusion, Employer’s Unemployment Tax Credit—If you hired must be filed with Form 740 and tax must be determined unemployed Kentucky residents to work for you during the on Schedule TC. last six months of 2000 or during 2001, you may be eligible to claim the unemployment tax credit. In order to claim a credit, Farm Income Averaging, Schedule J—If you elect farm each person hired must meet specific criteria. For each qualified income averaging on your federal return, you may also use person, you may claim a tax credit of $100. The period of this method for Kentucky. The amount of income you may unemployment must be certified by the Department for average is limited to the amount elected for federal pur- Employment Services, Cabinet for Workforce Development, poses. Complete Schedule J. Enter tax before deducting Second Floor West, 275 East Main Street, Frankfort, KY 40621- personal tax credits on Schedule TC, Line 2, and check the 0001, and you must maintain a copy of the certification in your box for “Schedule J.” Attach completed Schedule J. files. To claim this credit you must file Schedule UTC, and use Schedule TC to calculate your tax. Skills Training Investment Tax Credit—Enter the amount of credit certified by the Bluegrass State Skills Corporation. Recycling and/or Composting Tax Credit—Individuals who Attach a copy of the certification or Schedule K-1 in the first purchase recycling or composting equipment to be used year claimed. A taxpayer (corporation or individual) who exclusively in Kentucky for recycling or composting has received a final authorizing resolution from the postconsumer waste materials, are entitled to a credit Bluegrass State Skills Corporation is entitled to a nonre- against the tax equal to 50 percent of the installed cost of fundable credit against Kentucky individual or corporation the equipment. Application for this credit must be made on income tax. The credit is equal to 50 percent of the approved Schedule RC, which may be obtained from the Revenue cost incurred in connection with the company’s occupational Cabinet. A copy of Schedule RC and/or Schedule RC (K-1) or skills upgrade training program. The credit shall not reflecting the amount of credit approved by the Revenue exceed $500 per employee and $100,000 per approved com- Cabinet and Schedule TC must be attached to the return. pany per biennium. The excess credit over the company's (See Schedules RC and TC.) income tax liability in the year approved may be carried forward for three successive taxable years. For information Kentucky Investment Fund Tax Credit—Enter 25 percent of regarding the application and approval process for this credit, the total amount certified by the Kentucky Economic Devel- contact the Cabinet for Economic Development, Bluegrass opment Finance Authority (KEDFA). Attach a copy of the State Skills Corporation at (502) 564-2021. certification by KEDFA in the first year claimed. Effective for taxable years beginning after December 31, 1998, an Credit for Tax Paid to Another State—Kentucky residents investor (corporation or individual) whose cash contribu- are required to report all income received including income tion to an investment fund has been certified by KEDFA is from sources outside Kentucky. Within certain limitations, entitled to a nonrefundable credit against Kentucky indi- a credit for income tax paid to another state may be claimed vidual income tax, corporation income tax or corporation on Schedule TC. The credit is limited to the amount of Ken- license tax equal to 40 percent of the cash contribution. The tucky tax savings had the income reported to the other state amount of credit an investor may claim in any taxable year been omitted, or the amount of tax paid to the other state, is limited to 25 percent of the total amount of credit certi- whichever is less. fied by the authority as available to the investor. Any excess credit that may be claimed in any given year over the You may not claim credit for tax withheld by another state. investor’s combined income and license tax liabilities for You must file a return with the other state, and pay tax on the year may be carried forward. No credit may extend income also taxed by Kentucky in order to claim the credit. beyond 15 years of the initial certification. A copy of the other state’s return including a schedule of income sources must be attached to verify this credit. If you Coal Incentive Tax Credit—KRS 141.0405 and KRS 141.0406 owe tax in more than one state, the credit for each state allow a nonrefundable credit against corporation income must be computed separately. tax, individual income tax, corporation license tax and public service company property tax for Kentucky coal purchased Reciprocal States—Kentucky has reciprocal agreements and used for the purpose of generating electricity. Only coal with specific states. These agreements provide that taxpay- that is subject to Kentucky’s coal severance tax qualifies for ers be taxed by their state of residence, and not the state the credit. The credit is equal to $2 per ton of Kentucky coal where income is earned. Persons who live in Kentucky for purchased that is above the amount of Kentucky coal pur- more than 183 days during the tax year are considered resi- chased during the base year. The base year amount is the dents and reciprocity does not apply. The states and types amount of coal purchased in calendar year 1999 for exist- of exemptions are as follows: ing companies. For new entities, the base year amount will be zero. This provision is effective for 10 consecutive years Illinois, Ohio, West Virginia—wages and salaries beginning on July 15, 2001. This credit may be claimed on Indiana—wages, salaries and commissions returns filed after July 15, 2001. Michigan, Wisconsin—income from personal services (including salaries and wages) Employer GED Incentive Tax Credit—KRS Chapter 151B.127 Virginia—commuting daily, salaries and wages provides a nonrefundable income tax credit for employers who assist employees in completing a learning contract in Kentucky does not allow a credit for tax paid to a reciprocal which the employee agrees to obtain his or her high school state on the above income. If tax was withheld by a recipro- equivalency diploma. The credit is for 50 percent of the hours cal state, you must file directly with the other state for a the employee is released from work to study for the gen- refund of those taxes. eral educational development (GED) diploma multiplied by

13 the employee’s hourly salary. The credit shall not exceed the Cabinet for Workforce Development, Department of $1,250 per employee and shall be claimed in the year the Adult Education and Literacy. learning contract is completed. The employer shall com- plete the lower portion of the GED-Incentive Program Final LINE 17, Total Tax Liability—Married taxpayers filing a Report (Form DAEL-31) and attach a copy to the return to combined return must add the amounts on Line 16, claim this credit. Shareholders and partners should attach Columns A and B, and enter the sum on Line 17. Other a copy of Schedule K-1 showing the amount of credit dis- taxpayers should enter the amount from Line 16, Column B, tributed. For information regarding the program, contact on Line 17.

LINE 19, Low Income Tax Credit—A low income tax credit is The following examples are used in the worksheet below. allowed to single persons and married couples whose com- bined Kentucky adjusted gross income, Line 13, is not over Example 1 $25,000. Complete the following worksheet to determine your low income tax credit. Filing Status: Single or married filing joint return Three tax credits Caution: Married couples who file separate returns or separately on a combined return—If you are married Kentucky adjusted gross income of $15,000 (Form 740, Line 13) and living with your spouse, you must add your and your spouse's Kentucky adjusted gross income together to find Example 2 the correct low income tax credit percentage. If the total is greater than $25,000, you do not qualify for this credit. Filing Status: Married filing separately on this combined return or married filing separate returns Three tax credits (husband claims one; wife claims two) If the amount Enter decimal amount Kentucky adjusted gross income of $12,000 each (Form 740, Line 13) on line c below is: on line e Example 3

over but not over Filing Status: Married filing separately on this combined return or married filing separate returns --- $ 5,000 1.00 (100%) Three tax credits (husband claims one; wife claims two) $ 5,000 $10,000 .50 ( 50%) $10,000 $15,000 .25 ( 25%) Kentucky adjusted gross income of $12,000 (husband) and $14,000 $15,000 $20,000 .15 ( 15%) (wife) (Form 740, Line 13) $20,000 $25,000 .05 ( 5%)

Low Income Tax Credit Worksheet Example 1 Example 2 Example 3 a. Enter the amount from Column B, Line 13, but not less than zero. 15,000 12,000 12,000 b. Enter the amount from Column A, Line 13, but not less than zero. ++0 + 12,000 + 14,000 (If you are using Filing Status 4, enter the amount from Column B, Line 13, of your spouse’s separate return.) c. Add Lines a and b. 15,000 24,000 26,000 If over $25,000, you do not qualify for this tax credit. Do not complete the worksheet; skip Line 19.

Computation of Low Income Tax Credit d. Enter tax amount from Line 18. 535 770 e. Enter decimal amount from table above that applies to adjusted gross income on Line c. xx.25 x .05 f. Multiply amount on Line d by decimal amount on Line e. Enter result on Line 19. This is your Low Income Tax Credit. 134 39

14 LINE 21, Child and Dependent Care Credit—Enter in the LINE 29, Child Victims’ Trust Fund—You may contribute all space provided the amount of credit calculated on federal or a portion of your overpayment to this fund. The amount Form 2441, Line 9 (or Form 1040A, Schedule 2, Line 9), for of contribution entered on Line 29 will reduce your refund child and dependent care expenses. Multiply this amount accordingly. by 20 percent (.20), and enter result on Line 21. LINE 30, Bluegrass State Games and U.S. Olympic Com- If you do not meet the filing requirements to file a federal mittee Fund—You may contribute all or a portion of your income tax return but would have been entitled to the fed- overpayment to this fund. The amount of contribution eral child and dependent care credit, you may claim the child entered on Line 30 will reduce your refund accordingly. and dependent care credit for Kentucky purposes. Complete and attach federal Form 2441, state on the form “did not meet federal filing requirements” and follow instructions LINE 31, Veterans’ Program Trust Fund—You may contrib- for Line 21. ute all or a portion of your overpayment to this fund. The amount of contribution entered on Line 31 will reduce your LINE 23, Kentucky Use Tax—If, during the year, you made refund accordingly. any purchases out of state of tangible personal property for use in Kentucky on which sales tax was not charged, you must LINE 33, Estimated Tax—You may credit all or part of the report Kentucky use tax on those purchases, pursuant to KRS overpayment toward your estimated tax liability for 2002. 139.330. See the worksheet in the General Instructions. Do so by entering the amount you want credited on Line 33.

LINE 25(a), Tax Withheld—Enter the amount of 2001 Ken- tucky income tax withheld by your employer(s). This amount LINE 34—Subtract amounts entered on Lines 32 and/or 33 is shown on wage and tax statements which you must attach from Line 27. Enter the difference, if any, on Line 34. This to Form 740 in the designated area. amount will be refunded to you. If the total of Lines 32 and 33 equals the amount on Line 27, enter a zero on Line 34. You will not be given credit for Kentucky income tax with- held unless you attach the wage and tax statements reflect- Note: If the amount of Kentucky tax you overpaid is exces- ing Kentucky withholding. sive, obtain a copy of Form K-4A from your employer to see if you are entitled to additional allowances. If you are entitled Employers are required to give these statements to employ- to additional allowances, file a new Form K-4 with your ees no later than January 31, 2002. If by March 1 you are employer to reduce the amount of Kentucky tax withheld. unable to obtain a wage and tax statement from an em- ployer, contact the Revenue Cabinet for instructions.

You may not claim credit for tax withheld by another state. Tax Payment Summary Within certain limitations, Kentucky residents may claim a credit for nonrefundable individual income tax paid to other states on Schedule TC. LINE 35—This is your additional tax due before penalties LINE 25(b), Estimated Tax Paid—Enter Kentucky estimated and interest. tax payments made for 2001 and amounts credited from the 2000 return. Note: If you are a recipient of income from a pension or annuity which causes you to pay additional Kentucky in- Also include on Line 25(b) payments prepaid with exten- come tax, you may contact the payer and request voluntary sion requests. Identify as “prepaid with extension.” Kentucky withholding.

LINE 26—Enter the sum of Lines 25(a) and 25(b). Penalties and Interest Compare the amounts on Lines 24 and 26. If Line 26 is larger than Line 24, subtract Line 24 from Line 26. Enter the differ- LINE 36(a), Underpayment of Estimated Tax—If the amount ence on Line 27. This is the AMOUNT OVERPAID. owed is more than $500 and more than 30 percent of the income tax liability on Line 22, you may be subject to a pen- If Line 26 is smaller than Line 24, you owe additional tax. alty of 10 percent of the underpayment of estimated tax. Subtract Line 26 from Line 24. Enter on Line 35. For instruc- tions on payment, see Line 37, Amount You Owe. The amount of the penalty may be calculated on Form LINE 27, Amount Overpaid—If you have an overpayment 2210-K, which may be obtained from the Revenue Cabi- on Line 27, you may have all of this amount refunded to net. Form 2210-K may also be used by qualifying farmers you. You also may contribute all or part of it to the Nature and others to claim exception to the penalty. If paying and Wildlife Fund, the Child Victims’ Trust Fund, the Blue- the penalty or claiming an exemption, complete Form grass State Games and U.S. Olympic Committee Fund and/ 2210-K, attach it to your return and check the block below or the Veterans’ Program Trust Fund and/or credit all or part Line 36(a). Enter the amount of the penalty on Line 36(a). of it toward your 2002 estimated tax. The minimum is $25.

LINE 28, Nature and Wildlife Fund—You may contribute all Note: Taxpayers claiming a credit for tax paid to another or a portion of your overpayment to this fund. The amount state on Schedule TC, Line 5(c), must add the credit to Lines of contribution entered on Line 28 will reduce your refund 1 and 4, Part II, Form 2210-K, to determine the underpay- accordingly. ment and penalty.

15 If your return is filed and all tax due is paid before April 15, COPY OF FEDERAL RETURN 2002, you do not owe any other penalties or interest. If your return is filed after April 15, 2002, or any tax due on the You must attach a complete copy of your federal return if return is paid after April 15, 2002, you may be subject to you received farm, business, or rental income or loss. additional penalties and interest. The Kentucky Revenue Cabinet does not require copies if LINE 36(b), Interest—Interest will be assessed at the “tax none of the above apply or if you filed Form 1040EZ or interest rate” from the original due date of the return until 1040A. Check the box on Form 740, page 2, if you are not the date of payment. required to attach a copy of your federal return.

LINE 36(c), Late Payment Penalty—If the amount of tax due 2002 INCOME TAX BOOKLET as shown on Line 35 is not paid by the original due date of the return, a penalty of 2 percent of the tax computed due Check the appropriate box to indicate whether you wish to may be assessed for each 30 days or fraction thereof that receive only labels or a complete booklet of tax forms for the tax is past due, not to exceed 20 percent. The minimum the preparation of your 2002 income tax return. penalty is $10. However, if the amount timely paid is 75 percent of the tax determined due by the Revenue Cabinet, SIGN RETURN no late payment penalty will be assessed. Be sure to sign your return on page 2. Each return LINE 36(d), Late Filing Penalty—If a return is not filed by must be signed by the taxpayer. Joint and ✍ the due date or the extended due date, a penalty of 2 per- combined returns must be signed by both husband and wife. cent of the total tax due for each 30 days or fraction thereof Returns that are not signed may be returned to you for that a return is not filed may be assessed, not to exceed 20 signature. percent. The minimum penalty is $10. Please enter a telephone number where you can be reached Note: Penalties but not interest may be reduced or waived during regular working hours. You may be contacted for if reasonable cause for reduction or waiver can be shown. information which may help in processing tax returns.

LINE 37, Amount You Owe—When filing the return, you must pay any tax due shown on Line 37. Attach check pay- able to Kentucky State Treasurer to your return. To help identify your payment properly, write “KY Income Tax— 2001”and your Social Security number on the face of the check. Attach check at the left side of Form 740. Place the check on TOP of any wage and tax statements.

Note: If you cannot pay your tax in full, file your return and pay as much as possible by April 15. Contact the Revenue Cabinet for additional payment information.

2001-02 JOHN Q. PUBLIC 1234 MAIN STREET ANYTOWN KY 00000 April 15, 2002 DATE

PAY TO THE ORDER OF Kentucky State Treasurer$ 185.00 00 One hundred eighty-five and /100 DOLLARS KY Income Tax—2001 999-99-9999 John Q. Public

16 Instructions for Schedule M—Modifications to Federal Adjusted Gross Income

Additions to Federal Adjusted Gross Income At-Risk Limitations—Federal/Kentucky income (loss) differ- ences may create different allowable losses due to at-risk Line 1—Interest on securities issued by other states and their limitations. If you have amounts invested in an activity for political subdivisions is taxed by Kentucky and must be which you are not at risk and used federal Form 6198, At-Risk reported. Also report dividends received from regulated Limitations, complete federal Form 6198, using Kentucky investment companies (mutual funds) that are taxable for amounts, to determine if the Kentucky allowable loss dif- Kentucky income tax purposes. Note: Interest from securities fers from the federal allowable loss. For a passive activity, of Kentucky and its political subdivisions is exempt. use the Kentucky allowable loss to complete Form 8582-K. Line 2—Enter the self-employed health insurance deduc- For all other activities (nonpassive), enter the difference as tion from federal Form 1040, Line 28. an “other addition” or “other subtraction” on Schedule M, Line 4 or Line 13. Line 3—Enter resident adjustment from Kentucky Schedule K-1. Partners, beneficiaries of estates and trusts Note: Before entering the difference on Line 4 or Line 13 and S corporation shareholders, see Kentucky Schedule you must take into account any addition or subtraction pre- K-1 instructions. viously made on Schedule M affecting the at-risk limitations. Line 4—Enter other additions to federal adjusted gross income not listed above (attach detailed schedule). Line 5, Total Additions—Add Lines 1 through 4. Enter on Line 5 and on Form 740, page 1, Line 10. Include: • the portion of a lump-sum distribution on which you have Subtractions from Federal Adjusted Gross Income elected the 20 percent capital gains rate for federal income tax purposes (Schedule P and Form 4972-K required); • Line 6—Enter the amount of taxable state income tax refund the federal net operating loss deduction; or credit reported on your federal return and included as • the passive activity loss adjustment (see Form 8582-K income on Form 740, page 1, Line 9. and instructions); • differences in pension (3-year recovery rule) and IRA Line 7—Enter interest income from U.S. government bonds bases; and and securities. Do not include taxable interest from securi- • differences in gains (losses) from the sale of intangible ties, such as FNMA (Fannie Mae), GNMA (Ginnie Mae) and assets amortized under the provisions of the Revenue FHLMC (Freddie Mac), which are merely guaranteed by the Reconciliation Act of 1993; etc. U.S. government.

Line 8, Pension Income Exclusion—The 2001 exclusion amount is 100 percent of taxable retirement benefits or $37,500, which- ever is less. All pension and retirement income paid under a written retirement plan (qualified or unqualified) is eligible for exclusion. This includes pensions, annuities, IRA accounts, 401(k) and similar deferred compensation plans, income received from converting a regular IRA to a Roth IRA, death benefits, disability retirement benefits and other similar accounts or plans. This exclusion is for each taxpayer and must be computed independently of your spouse who may be filing on the same return. A husband and wife must complete and claim their own exclusion, regardless of filing status. Joint filers—Combine the sepa- rately computed pension exclusion amounts and enter on Schedule M, Line 8, Column B.

Pension Income Exclusion Worksheet Column A Column B Step 1. Spouse Yourself a. Enter taxable pension income reported on your federal Form 1040, Line 15(b) or 16(b); Form 1040A, Line 11(b) or 12(b) ...... a b. Enter disability retirement benefits on Form 1040, Line 7 or Form 1040A, Line 7 ...... b c. Enter deferred compensation reported on Form 1040, Line 7 or Form 1040A, Line 7 ...... c d. Add Lines a, b and c ...... d Step 2. Line d is $37,500 or less. Enter the amount from Line d on Schedule M, Line 8. Step 3. Line d is more than $37,500. Do you have retirement income from the federal government, the Commonwealth of Kentucky or a Kentucky local government; or supplemental U.S. Railroad Retirement Board benefits?...... o Yes o No o Yes o No If you answered no, enter $37,500 on Schedule M, Line 8. If you answered yes, you must complete Schedule P to determine your pension exclusion.

17 Line 9—Enter Social Security and Social Security equiva- Include: lent U.S. Railroad Retirement Board benefits included on • income received as a result of the Master Tobacco Settle- Form 740, page 1, Line 9. These amounts are reported on ment Agreement, the secondary settlement fund referred federal Form 1040, Line 20(b) (Form 1040A, Line 14(b)). to as “Phase II”; • income received from the Tobacco Loss Assistance Line 10, Long-term Care Insurance Premiums—Enter long- Program (TLAP); term care insurance premiums paid in 2001. Do not claim • as an itemized deduction. income of precinct workers for election training or work- ing at election booths; Line 11, Health Insurance Premiums—Enter medical and • capital gains on property taken by eminent domain; dental insurance premiums paid for yourself, your spouse • Kentucky net operating loss deduction; and your dependents. Note: Do not include on Line 11 in- • passive activity loss adjustment (see Form 8582-K and surance premiums paid by an employer-sponsored health instructions); insurance plan unless the premiums are included in Box 1 • income of a child reported on the parent’s return; of your W-2 form(s). Do not include long-term care insur- • artistic charitable contributions (if you do not itemize ance premiums included on Schedule M, Line 10. deductions); • the federal work opportunity credit used to reduce wages; Line 12—Enter resident adjustment from Kentucky • Schedule K-1. Partners, beneficiaries of estates and trusts at-risk limitations (see instructions for Line 4); and S corporation shareholders, see Kentucky Schedule • accelerated depreciation of a qualified farm networking K-1 instructions. Subtract the distributive share of net project; and income from an S corporation subject to the franchise • differences in the gains (losses) from the sale of intan- tax imposed under KRS 136.505 or the capital stock tax gible assets amortized under the provisions of the imposed under KRS 136.300. Revenue Reconciliation Act of 1993; etc.

Line 13—Enter other subtractions from federal adjusted Line 14, Total Subtractions—Add Lines 6 through 13. Enter gross income not listed above (attach detailed schedule). on Line 14 and on Form 740, page 1, Line 12.

Instructions for Schedule A

You may itemize your deductions for Kentucky even if you amounts you paid during 2001, but do not include amounts do not itemize for federal purposes. Generally, if your which have been previously deducted; paid by hospital, deductions exceed $1,750, it will benefit you to itemize. If health or accident insurance; or paid by your employer. Fed- you do not itemize, a standard deduction of $1,750 is allowed. eral rules apply for reimbursement.

Special Rules for Married Couples—If one spouse itemizes When you compute your deduction, you may include medi- deductions, the other must also itemize. Married couples cal and dental bills you paid for: filing a joint federal return and who wish to file separate Yourself. returns or a combined return for Kentucky may: (a) file separate Schedules A showing the specific deductions All dependents you claim on your return. claimed by each, or (b) file one Schedule A and divide the Your child whom you do not claim as a dependent total deductions between them based on the percentage of because of the rules for Children of Divorced or each spouse’s income to total income. Separated Parents.

Limitations on Itemized Deductions for High-Income Any person that you could have claimed as a dependent Taxpayers—If your adjusted gross income on Form 740, Line on your return if that person had not received $2,900 or 13, exceeds $132,950 ($66,475 if married filing separately more of gross income or had not filed a joint return. on a combined return or separate returns), your itemized deductions are reduced by the lesser of: Examples of Medical and Dental Payments You MAY Deduct (a) 3 percent of the amount by which your adjusted gross income exceeds $132,950 ($66,475 if married filing sepa- To the extent you were not reimbursed, you may deduct rately on a combined return or separate returns), or what you paid for: (b) 80 percent of your total itemized deductions except Medicines and drugs that required a prescription, medical and dental expenses, casualty and theft losses, or insulin. gambling losses and investment interest. Medical doctors, dentists, eye doctors, The limitations are computed on page 2, Part II, Schedule A chiropractors, osteopaths, podiatrists, (Form 740). psychiatrists, psychologists, physical therapists, acupuncturists and psychoanalysts (medical care only). Lines 1 through 3—Medical and Dental Expenses Medical examinations, X-ray and laboratory services, You may deduct only your medical and dental expenses insulin treatment and whirlpool baths your doctor that exceed 7.5 percent of Line 13, Form 740. Include all ordered.

18 Nursing help. If you pay someone to do both nursing Line 7, Other Taxes—Enter other taxes that are deductible, and housework, you may deduct only the cost of the including foreign income taxes paid. Do not deduct on nursing help. Schedule A any nonbusiness federal taxes or any taxes paid Hospital care (including meals and lodging), clinic costs in connection with a business or profession which are and lab fees. deductible on Schedule C, E or F. Medical treatment at a center for drug addicts or alcoholics. Taxes You MAY NOT Deduct Medical aids such as hearing aids (and batteries), false teeth, eyeglasses, contact lenses, braces, crutches, wheelchairs, Sales and use taxes. guide dogs and the cost of maintaining them. Usage taxes on motor vehicles. Lodging expenses (but not meals) paid while away from State or federal income taxes. home to receive medical care in a hospital or a medical State or federal inheritance or estate taxes. care facility that is related to a hospital. Do not include more than $50 a night for each eligible person. State gasoline taxes. Ambulance service and other travel costs to get medical Federal excise taxes on your personal expenditures, such care. If you used your own car, you may claim what as taxes on theater admissions, furs, jewelry, cosmetics, you spent for gas and oil to go to and from the place tires, telephone service, airplane tickets, etc. you received the care; or you may claim 12 cents a mile. Federal Social Security taxes. Add parking and tolls to the amount you claim under Hunting, fishing or dog licenses. either method. Auto inspection fees. Examples of Medical and Dental Payments Auto license fees. You MAY NOT Deduct Cigarette or liquor taxes. Taxes paid by you for another person. You may not deduct payments for the following: Motorboat registration fees. Elective cosmetic surgery. Drivers’ license fees. Hospital, medical and extra Medicare B insurance. To Sewer assessments. claim these expenses, see instructions for Schedule M, School taxes based on electric, water, sewer, gas and Line 11. telephone bills. The basic cost of Medicare insurance (Medicare A). (Note: If you are 65 or over and not entitled to Social Local or state insurance premiums taxes or surcharges. Security benefits, you may deduct premiums you vol- untarily paid for Medicare A coverage.) Lines 9 through 13—Interest Expense Life insurance or income protection policies. Long-term care insurance premiums. To claim, see You may deduct interest that you have paid during the tax- instructions for Schedule M, Line 10. able year on a home mortgage. You may not deduct inter- The hospital insurance benefits (Medicare) tax withheld est paid on credit or charge card accounts, a life insurance from your pay as part of the Social Security tax or paid loan, an automobile or other consumer loan, delinquent as part of Social Security self-employment tax. taxes or on a personal note held by a bank or individual. Nursing care for a healthy baby. Illegal operations or drugs. Interest paid on business debts should be deducted as a Medicines or drugs you bought without a prescription. business expense on the appropriate business income Travel your doctor told you to take for rest or change. schedule. Funeral, burial or cremation costs. You may not deduct interest on an indebtedness of another See federal Publication 502 for more information on allow- person when you are not legally liable for payment of the able medical and dental expenses including deductions for interest. Nor may you deduct interest paid on a gambling capital expenditures and special care for persons with debt or any other nonenforceable obligation. Interest paid disabilities. on money borrowed to buy tax-exempt securities or single Lines 4 through 8—Taxes premium life insurance is not deductible.

Taxes You MAY Deduct Line 9—List the interest and points (including “seller-paid points”) paid on your home mortgage to financial institu- Line 4, Local Income Taxes—Enter the total amount of local tions and reported to you on federal Form 1098. occupational (payroll) tax paid. Do not include state income taxes paid or withheld; they are not deductible. Line 10—List other interest paid on your home mortgage Line 5, Real Estate Taxes—Enter the amount of local and and not reported to you on federal Form 1098. Show name and address. state property taxes you paid on real estate owned by you. Do not report real estate taxes here that were paid in connection with a business or profession and have been Line 11—List points (including “seller-paid points”) not deducted on Schedule C, E or F. reported to you on federal Form 1098. Points (including loan origination fees) charged only for the use of money and Line 6, Personal Property Taxes—Enter property taxes paid paid with funds other than those obtained from the lender on automobiles, intangible property (accounts receivable, are deductible over the life of the mortgage. However, points bonds, etc.) or other personal property. may be deducted in the year paid if all three of the following

19 apply: (1) the loan was used to buy, build or improve your Veterans’ and certain cultural groups. main home, and was secured by that home, (2) the points Nonprofit schools, hospitals and organizations whose did not exceed the points usually charged in the area where purpose is to find a cure for, or help people who have the loan was made, and were figured as a percentage of the arthritis, asthma, birth defects, cancer, cerebral palsy, loan amount, and (3) if the loan was used to buy or build cystic fibrosis, diabetes, heart disease, hemophilia, the home, you must have provided funds (see below) at mental illness or retardation, multiple sclerosis, least equal to the points charged. If the loan was used to muscular dystrophy, tuberculosis, etc. improve the home, you must have paid the points with funds Federal, state and local governments if the gifts are solely other than those obtained from the lender. for public purposes. Funds provided by you include down payments, escrow If you contributed to a qualifying charitable organization deposits, earnest money applied at closing, and other and also received a benefit from it, you may deduct only amounts actually paid at closing. They do not include the amount that is more than the value of the benefit you amounts you borrowed as part of the overall transaction. received. Seller-Paid Points—If you are the buyer, you may be able Contributions You MAY Deduct to deduct points the seller paid in 2001. You can do this if the loan was used to buy your main home and the points Contributions may be in cash, property or out-of-pocket meet item 2 above. You must reduce your basis in the home expenses you paid to do volunteer work for the kinds of by those points, even if you don't deduct them. organizations described above. If you drove to and from the volunteer work, you may take 14 cents a mile or the If you are the seller, you cannot deduct the points as inter- actual cost of gas and oil. Add parking and tolls to the est. Instead, include them as an expense of the sale. amount you claim under either method. (But do not deduct This generally does not apply to points paid to refinance any amounts that were repaid to you.) your mortgage. Federal rules apply. See federal Publica- You are required to maintain receipts, cancelled checks or tion 936 for more information. other reliable written documentation showing the name of the organization and the date and amount given to support Line 12, Interest on Investment Property—Investment claimed deductions for charitable contributions. interest is interest paid on money you borrowed that is allocable to property held for investment. It does not include Separate contributions of $250 or more require written any interest allocable to a passive activity. substantiation from the donee organization in addition to your proof of payment. It is your responsibility to secure Complete and attach federal Form 4952, Investment Inter- substantiation. A letter or other documentation from the est Expense Deduction, to figure your deduction. qualifying charitable organization that acknowledges receipt Exception. You do not have to file federal Form 4952 if all of the contribution and shows the date and amount three of the following apply: constitutes a receipt. This substantiation should be kept in your files. Do not send it with your return. (a) your investment interest is not more than your invest- ment income from interest and ordinary dividends, See federal Publication 526 for special rules that apply if: (b) you have no other deductible investment expenses, and your total deduction for gifts of property is over $500, you gave less than your entire interest in the property, (c) you have no disallowed investment interest expense from 2000. your cash contributions or contributions of ordinary in- come property are more than 30 percent of Line 13, For more details, see federal Publication 550, Investment Form 740, Income and Expenses. your gifts of capital gain property to certain organiza- tions are more than 20 percent of Line 13, Form 740, or Lines 14 through 18—Contributions you gave gifts of property that increased in value, made bargain sales to charity, or gave gifts of the use of You may deduct what you actually gave to organizations property. that are religious, charitable, educational, scientific or liter- ary in purpose. You may also deduct what you gave to You MAY NOT Deduct as Contributions organizations that work to prevent cruelty to children or ani- mals. In general, contributions deductible for federal income Travel expenses (including meals and lodging) while tax purposes are also deductible for Kentucky. away from home unless there was no significant ele- ment of personal pleasure, recreation or vacation in the Examples of qualifying organizations are: travel. Churches, temples, synagogues, Salvation Army, Red Political contributions. Cross, CARE, Goodwill Industries, United Way, Boy Dues, fees or bills paid to country clubs, lodges, frater- Scouts, Girl Scouts, Boys and Girls Clubs of America, nal orders or similar groups. etc. Value of any benefit, such as food, entertainment or mer- Fraternal orders if the gifts will be used for the purposes chandise, that you received in connection with a contri- listed above. bution to a charitable organization.

20 Cost of raffle, bingo or lottery tickets. An amount equal to the fair market value of the property on the date contributed is allowable as a deduction. However, Cost of tuition. the deduction is limited to the amount of the taxpayer’s Value of your time or service. artistic adjusted gross income for the taxable year. Value of blood given to a blood bank. The transfer of a future interest in tangible personal The following requirements for a deduction must be met: property (generally, until the entire interest has been transferred). (a) The property must have been created by the personal Gifts to: efforts of the taxpayer at least one year prior to the date Individuals. contributed. The creation of this property cannot be Foreign organizations. related to the performance of duties while an officer or Groups that are run for personal profit. employee of the United States, any state or political Groups whose purpose is to lobby for changes in the subdivision thereof. laws. Civic leagues, social and sports clubs, labor unions and (b) A written appraisal of the fair market value of the con- chambers of commerce. tributed property must be made by a qualified inde- pendent appraiser within one year of the date of the Line 14—Enter on Line 14 all of your contributions paid by contribution. A copy of the appraisal must be attached cash or check (including out-of-pocket expenses). to the tax return. (c) The contribution must be made to a qualified organiza- Line 15—Enter on Line 15 your contributions of property. If tion as described in this section. you gave used items, such as clothing or furniture, deduct their fair market value at the time you gave them. Fair mar- Line 17—Enter on Line 17 any carryover of contributions ket value is what a willing buyer would pay a willing seller that you were not able to deduct in an earlier year because when neither has to buy or sell and both are aware of the they exceeded your adjusted gross income limit. See fed- conditions of the sale. If your total deduction for gifts of eral Publication 526 for details on how to figure your property is more than $500, you must complete and attach carryover. federal Form 8283, Noncash Charitable Contributions. If your total deduction is over $5,000, you may also have to obtain appraisals of the values of the donated property. See fed- Lines 19 through 21—Casualty and Theft Losses eral Form 8283 and its instructions for details. Line 19—Enter casualty or theft losses of property that is Enter on Line 15 the value of a leasehold interest property not trade, business, rent or royalty property. Attach federal contributed to a charitable organization to provide tempo- Form 4684, Casualties and Thefts, or a similar statement to rary housing for the homeless. Attach Schedule HH. figure your loss.

Recordkeeping—If you gave property, you should keep a Losses You MAY Deduct receipt or written statement from the organization you gave the property to, or a reliable written record, that shows the You may be able to deduct all or part of each loss caused organization’s name and address, the date and location of by theft, vandalism, fire, storm, and car, boat and other ac- the gift and a description of the property. You should also cidents or similar causes. You may also be able to deduct keep reliable written records for each gift of property that money you had in a financial institution but lost because of include the following information: the insolvency or bankruptcy of the institution.

(a) How you figured the property’s value at the time you You may deduct nonbusiness casualty or theft losses only gave it. (If the value was determined by an appraisal, to the extent that: you should also keep a signed copy of the appraisal.) (b) The cost or other basis of the property if you must re- (a) the amount of each separate casualty or theft loss is more than $100, and duce it by any ordinary income or capital gain that would have resulted if the property had been sold at its fair (b) the total amount of all losses during the year is more market value. than 10 percent of Line 13, Form 740. (c) How you figured your deduction if you chose to reduce your deduction for gifts of capital gain property. Special rules apply if you had both gains and losses from nonbusiness casualties or thefts. See federal Form 4684 for (d) Any conditions attached to the gift. details. (e) If the gift was a “qualified conservation contribution” under IRC Section 170(h), the fair market value of the Losses You MAY NOT Deduct underlying property before and after the gift, the type of legal interest donated and the conservation purpose Money or property misplaced or lost. furthered by the gift. Breakage of china, glassware, furniture and similar items under normal conditions. Line 16—Enter on Line 16 artistic charitable contributions. A deduction is allowed for “qualified artistic charitable con- Progressive damage to property (buildings, clothes, tributions” of any literary, musical, artistic or scholarly com- trees, etc.) caused by termites, moths, other insects position, letter or memorandum, or similar property. or disease.

21 Deduct the costs of proving you had a property loss as a Enter the amount of unreimbursed employee business miscellaneous deduction on Line 24, Schedule A. (Examples expense from federal Form 2106 or 2106-EZ on Line 22 of of these costs are appraisal fees and photographs used to Schedule A. establish the amount of your loss.) If you do not have to fill out federal Form 2106 or 2106- For more details, see federal Publication 547, Nonbusiness EZ, list the type and amount of your expenses in the space Disasters, Casualties, and Thefts. It also gives information provided. If you need more space, attach a statement about federal disaster area losses. showing the type and amount of the expense. Enter one total on Line 22. Lines 22 through 27—Miscellaneous Deductions Examples of expenses to include on Line 22 are: Most miscellaneous deductions cannot be deducted in full. You must subtract 2 percent of your adjusted gross income Travel, transportation, meal or entertainment expense. from the total. Compute the 2 percent limit on Line 26. (Note: If you have any of these expenses, you must use federal Form 2106 or 2106-EZ for all of your job-related Generally, the 2 percent limit applies to job-related expenses expenses.) you paid for which you were not reimbursed (Line 22). The Union dues. limit also applies to certain expenses you paid to produce or collect taxable income (Line 24). See the instructions for Safety equipment, small tools and supplies required for Lines 22 and 24 for examples of expenses to claim on these your job. lines. Uniforms required by your employer, and which you may not usually wear away from work. The 2 percent limit does not apply to certain other Protective clothing, required in your work, such as hard miscellaneous expenses that you may deduct. These hats and safety shoes and glasses. expenses can be deducted in full on Line 28. The Line 28 instructions describe these expenses. Included are Physical examinations required by your employer. deductible gambling losses (to the extent of winnings) and Dues to professional organizations and chambers of certain job expenses of disabled employees. See federal commerce. Publication 529, Miscellaneous Deductions, for more Subscriptions to professional journals. information. Fees to employment agencies and other costs to look for Expenses You MAY NOT Deduct a new job in your present occupation, even if you do not get a new job. Political contributions. Business use of part of your home but only if you use Personal legal expenses. that part exclusively and on a regular basis in your work Lost or misplaced cash or property (but see casualty and and for the convenience of your employer. For details, theft losses). including limits that apply, see federal Publication 587, Expenses for meals during regular or extra work hours. Business Use of Your Home. The cost of entertaining friends. Education expenses you paid that were required by your Expenses of going to or from your regular workplace. employer, or by law or regulations, to keep your salary Education needed to meet minimum requirements for your or job. In general, you may also include the cost of keep- job or that will qualify you for a new occupation. ing or improving skills you must have in your job. For Travel expenses for employment away from home if that more details, see federal Publication 508, Educational period of employment exceeds one year. Expenses. Some education expenses are not deduct- Expenses of: ible. See “Expenses You MAY NOT Deduct.” (a) Travel as a form of education. (b) Attending a seminar, convention or similar meeting unless it is related to your employment. Line 23—Use this line to report tax return preparation fees paid during the taxable year including fees paid for filing (c) Adopting a child, including a child with special your return electronically. needs. Fines and penalties. Expenses of producing tax-exempt income. Line 24—Use this line for amounts you paid to produce or Amounts paid to organizations or establishments which collect taxable income and manage or protect property held have been found to practice discrimination. for earning income. List the type and amount of each expense in the space provided. If you need more space, Expenses Subject to the 2 Percent Limit attach a statement showing the type and amount of each expense. Enter one total on Line 24. Examples of these Line 22—Use this line to report job-related expenses you expenses are: paid for which you were not reimbursed. In some cases you MUST first fill out federal Form 2106, Employee Business Safe deposit box rental. Expenses, or Form 2106-EZ, Unreimbursed Employee Busi- Certain legal and accounting fees. ness Expenses. Fill out Form 2106-EZ if you claim any Clerical help and office rent. unreimbursed travel, transportation, meal or entertainment expenses for your job. Fill out Form 2106 if your employer Custodial (e.g., trust account) fees. paid you for any of your job-related expenses reportable Your share of the investment expenses of a regulated on Line 22. investment company.

22 Certain losses on nonfederally insured deposits in an Deduction for repayment of amounts under a claim of insolvent or bankrupt financial institution. For more right if more than $3,000. See federal Publication 525. information (including limits on the amount you can Unrecovered investment in a pension. deduct), see federal Publication 529. Impairment-related work expenses of a disabled person. Deduction for repayment of amounts under a claim of right if $3,000 or less. List the type and amount of each expense. Enter one total Expenses related to an activity not engaged in for profit. on Line 28. For more information on these expenses, see These expenses are limited to the income from the federal Publication 529. activity that you reported on federal Form 1040, Line 22. See Not-for-Profit Activities in federal Publication Line 29, Total Itemized Deductions 535, Business Expenses, for details on how to figure the amount to deduct. If the amount on Form 740, Line 13, exceeds $132,950 ($66,475 if married filing separately on a combined return Expenses NOT Subject to the 2 Percent Limit or separate returns), skip Part I and complete Part II on page 2. Line 28—Use this line to report miscellaneous deductions that are NOT subject to the 2 percent adjusted gross income Dividing Deductions Between Spouses—Married taxpayers limit. Only the expenses listed below can be deducted on who are filing separate returns or a combined return but Line 28. using only one Schedule A must divide the itemized deductions. Complete page 2, Part I, Lines 1 through 4. If Gambling losses to the extent of gambling winnings. one spouse is not required to file a Kentucky return, total Gambling winnings must be included in federal adjusted deductions may be divided between them based on the gross income (Form 740, Line 9). (Note: Gambling losses percentage of each spouse’s income to total income or must be verified by supplemental records. These include separate Schedules A may be filed. a diary and unredeemed tickets, payment slips and win- ning statements.) Federal estate tax on income in respect of a decedent. Amortizable bond premium on bonds acquired before October 23, 1986.

Kentucky Revenue Cabinet Mission Statement

To provide courteous, accurate and efficient services for the benefit of Kentucky and its citizens, and admin- ister the tax laws of the Commonwealth in a fair and impartial manner.

The Kentucky Revenue Cabinet does not discriminate on the basis of race, color, national origin, sex, reli- gion, age or disability in employment or the provision of services.

23 YOUR RIGHTS AS A KENTUCKY TAXPAYER

The mission of the Kentucky Revenue Cabinet (KRC) is to provide Guarantee—You have the right to a guarantee that KRC courteous, accurate and efficient services for the benefit of employees are not paid, evaluated or promoted based on taxes Kentucky and its citizens, and administer the tax laws of the assessed or collected, or a tax assessment or collection quota or Commonwealth in a fair and impartial manner. goal imposed or suggested.

As a Kentucky taxpayer, you have the right to expect the KRC to Damages—You have the right to file a claim for actual and direct honor its mission and uphold your rights every time you contact monetary damages with the Kentucky Board of Claims if a KRC or are contacted by the KRC. employee willfully, recklessly and intentionally disregards your rights as a Kentucky taxpayer. RIGHTS OF TAXPAYER Interest—You have the right to receive interest on an Privacy—You have the right to privacy of information provided overpayment of tax, except delinquent property tax, payable at to the KRC. the same rate you would pay if you underpaid your tax.

Assistance—You have the right to advice and assistance from REVENUE CABINET RESPONSIBILITIES the KRC in complying with state tax laws. The KRC has the responsibility to: Explanation—You have the right to a clear and concise • perform audits, conduct conferences and hearings with you at explanation of: reasonable times and places; • basis of assessment of additional taxes, interest and • authorize, require or conduct an investigation or surveillance penalties, or the denial or reduction of any refund or credit of you only if it relates to a tax matter; claim; • make a written request for payment of delinquent taxes which • procedure for protest and appeal of a determination of the are due and payable at least 30 days prior to seizure and sale KRC; and of your assets; • tax laws and changes in tax laws so that you can comply with • conduct educational and informational programs to help you the law. understand and comply with the laws; Protest and Appeal—You have the right to protest and appeal a • publish clear and simple statements to explain tax determination of the KRC if you disagree with an assessment of procedures, remedies, your rights and obligations, and the tax or penalty, reduction or a denial of a refund, a revocation of rights and obligations of the KRC; a license or permit, or other determination made by the KRC. • notify you in writing when an erroneous lien or levy is released and, if requested, notify major credit reporting Conference—You have the right to a conference to discuss a tax companies in counties where lien was filed; matter. • advise you of procedures, remedies and your rights and Representation—You have the right to representation by your obligations with an original notice of audit or when an original authorized agent (attorney, accountant or other person) in any notice of tax due is issued, a refund or credit is denied or hearing or conference with the KRC. You have the right to be reduced, or whenever a license or permit is denied, revoked or informed of this right prior to the conference or hearing. If you canceled; intend for your representative to attend the conference or • notify you in writing prior to termination or modification of a hearing in your place, you may be required to give your payment agreement; representative a power of attorney before the KRC can discuss • furnish copies of the agent’s audit workpapers and a written tax matters with your authorized agent. narrative explaining the reason(s) for the assessment; and Recordings—You have the right to make an audio recording of • resolve tax controversies on a fair and equitable basis at the any meeting, conference or hearing with the KRC, or to be administrative level whenever possible. notified in advance if the KRC plans to record the proceedings and to receive a copy of any recording. The KRC has a Taxpayer Ombudsman’s Office which consists of the Ombudsman and a staff whose job is to serve as an advocate Consideration—You have the right to consideration of: for taxpayers’ rights. One of the main functions of the office is to • waiver of penalties or collection fees if "reasonable cause" for ensure that your rights as a Kentucky taxpayer are protected by reduction or waiver is given ("reasonable cause" is defined in the KRC. KRS 131.010(9) as: "an event, happening, or circumstance The Taxpayer Ombudsman’s Office may be contacted by entirely beyond the knowledge or control of a taxpayer who telephone at (502) 564-7822 (between 8:00 a.m. and 4:30 p.m. has exercised due care and prudence in the filing of a return or weekdays). From a Telecommunication Device for the Deaf report or the payment of monies due the cabinet pursuant to (TDD), call (502) 564-3058. The mailing address is: Office of law or administrative regulation"); Taxpayer Ombudsman, P.O. Box 930, Frankfort, Kentucky • installment payments of delinquent taxes, interest and 40602-0930. penalties; * * * * * * * * * * * * * * • waiver of interest and penalties, but not taxes, resulting from This information merely summarizes your rights as a Kentucky incorrect written advice from the KRC if all facts were given taxpayer and the responsibilities of the Revenue Cabinet. The and the law did not change or the courts did not issue a ruling Kentucky Taxpayers’ Bill of Rights may be found in the Kentucky to the contrary; Revised Statutes (KRS) at Chapter 131.041—131.081. Additional • extension of time for filing reports or returns; and rights and responsibilities are provided for in KRS 131.020, • payment of charges incurred resulting from an erroneous 131.110, 131.170, 131.183, 131.500, 133.120, 133.130, 134.580 filing of a lien or levy by the KRC. and 134.590.

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