Updated October 19, 2026. Quick answer: Kentucky Schedule M lists modifications to federal adjusted gross income and is enclosed with Form 740. Line 9 is the pension income exclusion, computed separately for each taxpayer and spouse. A short worksheet on the instructions page decides whether the amount comes straight from your pension income or needs Schedule P. Total subtractions carry to Form 740.
What this form does
The form is headed “Enclose with Form 740”, and its instructions are titled “Modifications to Federal Adjusted Gross Income”. Line 9 reads “Enter excludable amount of retirement income”. For the state’s wider pension rules see Kentucky retirement taxes and whether Kentucky taxes pensions.
Who it applies to
The instructions for line 9 say “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.”
On spouses: “This exclusion is for each taxpayer and must be computed independently of your spouse who may be filing on the same return.” “A taxpayer and spouse must complete and claim their own exclusion, regardless of filing status.” For joint filers, “Combine the separately computed pension exclusion amounts and enter on Schedule M, Line 9, Column B.”
The lines, one by one
| Line | What the form says |
|---|---|
| Line 5 | “Enter other additions to federal adjusted gross income not listed above (enclose detailed schedule).” Among the items it lists: “differences in pension (3-year recovery rule) and IRA bases” |
| Line 9 | “Enter excludable amount of retirement income (enclose Schedule P if more than $31,110 per taxpayer)” |
| Line 15 | “Add line 7 through 14” |
| Line 17 | “Add lines 15 and 16. Enter here and on Form 740, page 1, line 8.” |
The Pension Income Exclusion Worksheet on the instructions page starts with these entries:
| Worksheet line | What the form says |
|---|---|
| (a) | “Enter taxable pension income reported on your federal Form 1040 or 1040-SR, line 4(b) or 5(b)” |
| (b) | “Enter disability retirement benefits on Form 1040 or 1040-SR, line 1” |
| (c) | “Enter deferred compensation reported on Form 1040 or 1040-SR, line 1” |
| (d) | “Add lines (a), (b) and (c)” |
The federal lines it points to are explained in Form 1040 lines 5a and 5b and Form 1040 lines 4a and 4b.
The figures the form prints
The cap is stated in one sentence: “The 2025 exclusion amount is 100 percent of taxable retirement benefits or $31,110, whichever is less.” The worksheet then splits into steps. “Line (d) is $31,110 or less. Enter the amount from line (d) on Schedule M, line 9.” “Line (d) is more than $31,110.” “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?” “If you answered no, enter $31,110 on Schedule M, line 9.” “If you answered yes, you must complete Schedule P to determine your pension exclusion.”
Where the result goes next
Line 9 is one of the subtractions that the form totals: “Add line 7 through 14” on line 15, then “Add lines 15 and 16. Enter here and on Form 740, page 1, line 8.” The wider federal and state comparison is in Kentucky tax on 401(k) and IRA withdrawals.
A worked example
Illustration, not a state example: the figures below are invented to show the first worksheet steps. If line (d) comes to $22,000 the worksheet’s second step applies, because that is below the $31,110 sentence printed above.
| Worksheet line | Amount |
|---|---|
| (a), invented | $18,000 (invented, for the computation) |
| (b), invented | none |
| (c), invented | $4,000 (invented, for the computation) |
| (d) | $22,000 (computed) |
Under step 2, the amount from line (d) would go on Schedule M, line 9. A person whose line (d) is higher follows step 3 instead.
Edition and line numbers
This page reads the 2025 Kentucky Schedule M (the Form 740 enclosure, form 42A740-M) with its instructions for tax year 2025, the current file the Kentucky Department of Revenue served on 2026-10-19. Check the edition printed on your own form and use that edition’s line numbers.
Common mistakes
- Computing the exclusion on a joint basis. The instructions say “This exclusion is for each taxpayer and must be computed independently of your spouse who may be filing on the same return.”
- Entering the cap without checking who is above it. The worksheet says “If you answered yes, you must complete Schedule P to determine your pension exclusion.”
- Putting a pension basis difference on line 9. The instructions send it to line 5, listing “differences in pension (3-year recovery rule) and IRA bases” among the other additions.
Related: Kentucky retirement taxes, whether Kentucky taxes pensions, Form 1040 lines 5a and 5b, Form 1040 lines 4a and 4b, and Kentucky tax on 401(k) and IRA withdrawals.
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Answer againSources
- Kentucky Schedule M, Federal Adjusted Gross Income Modifications, enclose with Form 740 (2025), Kentucky Department of Revenue: revenue.ky.gov
- Related official page (not quoted): 2025 Form 740-NP Packet Instructions, Kentucky Department of Revenue: revenue.ky.gov
Read from the state revenue documents linked above on October 19, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer or the state revenue department is the right place to confirm anything consequential.