The Kentucky Legislature made several tax law changes at the end of its 2018 session. House Bill 366 was passed on April 13th over the Governor’s veto and an additional bill, HB 487, became law on April 27th when Governor Bevin failed to either sign or veto the bill.
Some of the changes are retroactive to January 1, 2018 including:
- Replace the current six-bracket individual income tax which ranges from 2% to 6% with a flat 5% tax;
- Replace the current three-bracket corporate income tax with a 5% flat rate;
- Remove most deductions and repeal the personal exemption credit;
- Decrease the amount of pension income excluded from income tax to $31,110.
Other changes detailed in the 378-page bill will be effective July 1, 2018 such as, additional services in the sales tax base, increases to the cigarette tax and new tire fee. The full bill can be accessed here.
While the new 5% flat tax for individual taxpayers is a reduction from the prior top rate of 6%, many may still find tax-exempt municipal bonds to be a beneficial investment. Using the current three top federal tax brackets along with the 2018 Kentucky state income tax rate and the Net Investment Income Tax, the chart at right illustrates what a taxable investment would have to yield to match a 2% tax-free investment.
For more information, please consult your tax professional. A full report on taxable equivalent yields using the new tax is available here.
The Net Investment Income tax is a 3.8% tax established by the Patient Protection and Affordable Care Act (PPACA) that applies to the lesser of (1) net investment income or (2) the excess of a taxpayer’s modified adjusted gross income (MAGI) in excess of an applicable threshold amount. For more information, please consult your professional tax advisor.