Why is the state of Kentucky using the Federal tax credit as my income?? So it says I owe more in taxes than I made.

The Kentucky Form 740 begins by pulling in the adjusted gross income from your Federal return (line 8b of Form 1040) on line 5. Many states begin their tax calculations from the Federal AGI and adjust your in-state taxable income as a percentage of your total.

From there, Kentucky allows subtractions to determine your taxable income on line 11. The tax rate in Kentucky is 5%. As long as you allocate the income earned in the state of Kentucky or taxable therein, it will allocate the percentage taxable in the state. W-2 income should be allocated based on boxes 15-17. If you had other income sources, you may need to indicate in the software where the income is taxable.

Kentucky Form 740