What Is Kentucky Schedule M and Do I Need to File It?

Kentucky Schedule M is a state-specific tax form used to make adjustments to your federal adjusted gross income (AGI), reconciling the differences between what is taxed at the federal level versus by the state of Kentucky. The form accounts for certain income that Kentucky taxes but the federal government does not, and vice-versa. This calculation ensures that your income is correctly stated according to Kentucky’s tax laws before determining your final state tax liability. The schedule is separated into two main parts: additions to your federal income and subtractions from it.

Determining if You Need to File Schedule M

Filing Schedule M is not optional for taxpayers who need to report specific modifications to their federal AGI for Kentucky tax purposes. Any individual, corporation, or fiduciary that has income or deductions treated differently for Kentucky tax than for federal tax must complete and attach this schedule to their state return.

The requirement to file is tied to the type of return you are submitting. Individual residents filing Form 740 will attach Schedule M if they have any of these state-specific adjustments. Likewise, corporations filing Form 720 and fiduciaries filing Form 741 must use the corresponding sections of their returns or a similar schedule to make these modifications. The schedule acts as the supporting documentation for the adjustments claimed on the main tax form.

Information Required to Complete Schedule M

You will need a completed copy of your federal income tax return, such as Form 1040, as your federal AGI is the starting point for the form. You also need records of any federal income tax payments made during the tax year, which can be found on your Form W-2s and Form 1099s. Records of any federal estimated tax payments you made throughout the year are also required.

Additionally, you must have documentation for any specific items being adjusted. This includes statements for interest received from U.S. government securities or municipal bonds from other states. If you received a prior-year state tax refund, you will need the Form 1099-G that reports this amount. For taxpayers with income from partnerships or S-corporations, the Kentucky Schedule K-1 is needed, as it provides the specific amounts to be adjusted on Schedule M.

Calculating the Deduction Step by Step

The calculation process on Schedule M involves systematically listing additions and subtractions to your federal AGI. You begin Part I by entering additions, such as interest from out-of-state municipal bonds. Other additions may include adjustments from a Kentucky Schedule K-1 or a federal net operating loss, which are entered on subsequent lines. After summing all additions, the total transfers to the main Form 740.

Part II of the schedule is for subtractions from federal income. You would enter the amount of any state income tax refund that was included as income on your federal return. Another line is used to subtract interest income received from U.S. government bonds and securities. Other subtractions, such as pension income exclusions and active duty military pay, are entered on their designated lines. The final figure for total subtractions is the sum of these items and any Kentucky Net Operating Loss deduction, and this total then transfers to Form 740.

Where to Report the Deduction

Once you have completed all the calculations on Schedule M, the final figures are transferred to your main Kentucky income tax return. For individual filers using Form 740, the total additions from Schedule M, Line 6, are reported on Line 6 of Form 740. The total subtractions, found on Schedule M, Line 17, are entered on Line 8 of Form 740.

This transfer is the mechanism by which your federal AGI is officially modified to become Kentucky adjusted gross income. Corporate and fiduciary filers will find similar lines on their respective tax forms to report the totals from their modification schedules. Attaching the completed Schedule M to your return is mandatory to document how you arrived at these figures.