It depends. Because of tax law changes in Kentucky, if you are able to itemize deductions this year, you may have a way of simplifying the allocations this year, without impacting your return: If you are itemizing in KY this year, use the status of "Married Filing Joint", instead of "Married Filing Separate on a combined return". When you do, no allocation is necessary: all of the state tax refund will appear on one line on Schedule M line 7. Here's why using that status will not affect your tax result:
Kentucky changed from a "tax-bracket" system to a 5% flat tax on all of their taxable income. Thus, the filing status "married filing separate on a combined return" only has an impact on your return if you each use the KY Standard Deduction against your income. This is because if you file joint, you only get one standard deduction of $2530 against all of your joint income. However, if you each have income, you get $2530 deduction against your income, and your spouse gets a second $2530 deduction off his/her income. Afterwards, each of you will pay 5% tax off of the remaining income.
If you itemize, the result won't be any different if you split the deductions between you or take them combined. You pay the same tax. Let's say you have 30,000 in income and your spouse 25,000, and you have 10,000 in KY itemized deductions this year. For simplification (although KY prorates between the two), you each take 5,000 in deductions. On your "separate combined" returns your spouse pays 5% tax on 20,000, you pay 5% on 25,000, and the two amounts are added together. On a joint return, you pay 5% tax on 45,000. There is no difference between the two.
Comment if you are using the KY standard deduction of $2530 per person instead of itemizing. I can assist you to allocate in that case. Otherwise, file joint for KY. It will be easier and you get the same final result.
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