If you are not a resident of Kentucky, you are subject to Kentucky state income tax on all income from Kentucky sources, from activities carried on in Kentucky, income from services performed in Kentucky, and income from property located in Kentucky. If you are a part-year resident of Kentucky you are subject to Kentucky state tax on all your income from all sources during the part of the year you are a Kentucky resident, and on your income from Kentucky sources during the part of the year you are a nonresident.
According to the Kentucky Department of Revenue, you are considered a resident of Kentucky if you maintain a permanent residence in Kentucky or if you are not domiciled in Kentucky but you live in Kentucky for more than 183 days during the tax year. Nonresidents and part-year residents must file Form 740-NP if they had any income from Kentucky sources and their gross income from all sources is over a certain amount of modified gross income based on their family size. Persons who have Kentucky gross receipts from self-employment over the modified gross income for their family size must also file a return.
Kentucky has reciprocal tax agreements with certain states. According to these agreements, taxpayers are taxed in their state of residence and not in the state where the income is earned. But the Kentucky Department of Revenue points out that these reciprocal agreements do not apply if you live in Kentucky for more than 183 days during the year.
Kentucky’s reciprocal agreements with Illinois and West Virginia cover wages and salaries. An agreement with Indiana covers wages, salaries and commissions. Agreements with Michigan and Wisconsin cover income from personal services including wages and salaries. An agreement with Ohio covers wages and salaries except for wages that an S corporation pays to a shareholder employee who directly or indirectly holds 20% or more of the equity of the S corporation. And, a reciprocal agreement with Virginia covers salaries and wages for commuting daily.
The Kentucky Department of Revenue points out that gambling income and distributive income in Kentucky that is reported on a Schedule K-1 are not exempt under the reciprocal agreements and would be subject to Kentucky state income tax.
If you apply for an exemption under the reciprocal agreements and Kentucky taxes are withheld from your pay, and you do not have any other Kentucky taxable income, you should file Form 740-NP-R, Kentucky Income Tax Return, Nonresident-Reciprocal State, to obtain a refund.
Some examples of income from Kentucky sources that are taxable for a nonresident include salaries, wages and other compensation for services performed in Kentucky, except as excluded under the reciprocal agreements; income from a business, trade, profession or farm in Kentucky; income from a partnership or S corporation in Kentucky; rents and royalties from real and tangible personal property located in Kentucky; gains from the sale of real or personal property located in Kentucky; and gambling winnings from Kentucky sources. According to the Kentucky Department of Revenue, gains or losses on the sale of intangible assets are generally reported to the state in which you reside.
An individual owner of a single member LLC that has income from Kentucky sources would have to file Form 725, Kentucky Single Member LLC Individually Owned LLET Return to calculate and pay the limited liability entity tax.
Military personnel who are residents of another state and are stationed in Kentucky are not required to report their military pay. If they have a civilian job they would have to report that income, unless they are residents of a reciprocal state. And any other Kentucky source income would have to be reported. Spouses of service members who are not residents of Kentucky and are in Kentucky only to be with their service member spouses are not subject to tax on income from services performed in Kentucky. They would be subject to tax if they have income from other sources in Kentucky.
Form 725, Kentucky Single Member LLC Individually Owned LLET Return
Form 740-NP, Kentucky Department of Revenue
Form 740-NP-R, Kentucky Department of Revenue
Kentucky Income Tax Return Nonresident or Part-Year Resident, Kentucky Department of Revenue