Does Kentucky Tax Social Security and Retirement Income?

Kentucky does not tax Social Security

Kentucky law excludes Social Security and railroad retirement benefits that are subject to federal income tax from Kentucky adjusted gross income. The exclusion has no income limit and no age condition, and it is separate from the $31,110 exclusion for other retirement income, so benefits do not use up any of that room. (Kentucky Revised Statutes 141.019, Calculation of adjusted gross income and net income (effective July 15, 2026))

On the return, the taxable amount from federal Form 1040 or 1040-SR, line 6b, is entered on Schedule M, line 10, and comes out of income with the other subtractions on Form 740, line 8. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

The federal government is a separate matter. Up to 85% of a benefit can be taxed on a federal return once other income passes fixed thresholds, wherever you live. Our taxable Social Security calculator shows how much of yours is counted.

The first $31,110 of each person’s retirement income is excluded

For taxable years beginning on or after January 1, 2018, the statute excludes up to $31,110 of total distributions from pension plans, annuity contracts, profit-sharing plans, retirement plans and employee savings plans, and it defines those to include individual retirement accounts. The figure is fixed in the statute, not indexed; it was $41,110 through 2017. The statute sets no minimum age. (Kentucky Revised Statutes 141.019, Calculation of adjusted gross income and net income (effective July 15, 2026))

The exclusion belongs to each taxpayer and is computed independently of a spouse, whatever the filing status. A person with $31,110 or less of retirement income excludes all of it on Schedule M, line 9. In our first couple, one spouse has $55,000 of pension and IRA income and excludes $31,110; the other has $15,000 and excludes $15,000. The $16,110 of exclusion the second spouse does not use cannot be passed to the first. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

Pensions from the federal government, the Commonwealth of Kentucky and Kentucky local governments get more. A retiree who retired before January 1, 1998 excludes the whole pension. For a retirement after December 31, 1997, the share of the pension earned through service before January 1, 1998 is exempt, figured as months of service credit before 1998 divided by total months, and the rest joins other retirement income under the $31,110 limit. Schedule P is required when retirement income is over $31,110 and includes one of these pensions. (Kentucky Department of Revenue, Schedule P: Kentucky Pension Income Exclusion (2025), with instructions)

Military retirement pay is handled as a federal government pension: the Form 740 instructions list federal and military retirement systems together, exempt for those who retired before January 1, 1998 and partly exempt, by pre-1998 service, for those who retired later. A career that began after 1997 gets the $31,110 exclusion and no more. Active duty military pay is exempt in full. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

IRA and 401(k) withdrawals and Roth conversions share the $31,110 exclusion

The Form 740 instructions say all pension and retirement income paid under a written retirement plan, qualified or not, is eligible: pensions, annuities, IRA accounts, 401(k) and similar deferred compensation plans, death benefits and disability retirement benefits. One $31,110 limit covers the total, so a person with a $20,000 pension and $20,000 of IRA withdrawals, like the single retiree in our examples, excludes $31,110 and is taxed on $8,890. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

The same instructions name income received from converting a regular IRA to a Roth IRA as eligible retirement income. A conversion is therefore excluded to the extent the person’s exclusion is not already used by pensions and withdrawals that year, and taxed at 3.5% above that. In our first couple the lower-income spouse could convert $16,110 with no Kentucky tax; the same conversion by the other spouse would cost $564. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

To size a conversion against federal brackets and Medicare surcharges, see the Roth conversion calculator; for required withdrawals, the RMD calculator.

Interest, dividends and capital gains are taxed at the flat 3.5% rate

Kentucky starts from federal adjusted gross income and has no lower rate or exclusion for long-term capital gains or qualified dividends. Among the few gains the statute removes are those on property taken by eminent domain. A $40,000 long-term gain adds $1,400 of tax at the 2026 rate. (Kentucky Revised Statutes 141.019, Calculation of adjusted gross income and net income (effective July 15, 2026))

Interest on bonds issued by other states and their localities is taxed by Kentucky and added on Schedule M, line 1; interest on securities of Kentucky and its political subdivisions is exempt. Interest on U.S. government bonds and securities is subtracted on line 8, but not interest on securities that are merely guaranteed by the federal government, such as Fannie Mae, Ginnie Mae and Freddie Mac issues. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

The individual income tax is 3.5% of net income for taxable years beginning on or after January 1, 2026. It was 4% for 2024 and 2025 and 5% as recently as 2022. One rate applies at every income level and to every filing status. The statute also gives a $40 tax credit to a taxpayer who is 65 before the end of the year, and another $40 to one who is blind. (Kentucky Revised Statutes 141.020, Levy of income tax on individuals: rate, reduction conditions and tax credits)

The standard deduction for 2026 is $3,360, up $90 from 2025. The Department of Revenue recalculates it each year for inflation, and the 2026 amount is the one built into 2026 tax forms. (Kentucky Department of Revenue: Kentucky DOR Announces 2026 Standard Deduction (September 4, 2025))

A joint return gets only one standard deduction. Married couples who both have income can instead use Filing Status 2, married filing separately on a combined return: each spouse reports their own income and deductions in a separate column of the same Form 740, and each column takes the standard deduction. The instructions say this usually produces a lower tax than a joint return. Our couple examples use it, with investment income split evenly between the spouses; the second deduction is worth $117.60 at 3.5%. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

Local income taxes in Kentucky take the form of occupational license taxes on wages and business net profits, collected locally and not on the state return. In Louisville Metro, for example, a resident employee pays 2.20% of wages (1.25% occupational tax, 0.20% transit tax and 0.75% school boards tax). The Louisville regulations list amounts paid from retirement plans as compensation that is not subject to the tax; wages from part-time work and net profit from self-employment are. (Louisville Metro Revenue Commission, Occupational License Tax Regulations (effective January 1, 2026))

Beyond the pension income exclusion, which has no age test, a $40 personal tax credit is allowed for each filer or spouse who is 65 or older, claimed on Schedule ITC. A couple who are both 65 subtract $80 from their tax. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

Homeowners who are 65 or older qualify for the homestead exemption, which removes $49,100 from the assessed value of a primary residence for the 2025 and 2026 assessment years. It is described under property tax below. (Kentucky Department of Revenue: Homestead Exemption)

The same three households appear on every state page, so the figures can be compared across states. Each is a full-year resident taking the standard deduction, with no dependents. The figures are state income tax only: any county, city or school district income tax is described on this page but not added in. Pension income is from a private employer, and IRA figures are taxable withdrawals from traditional accounts. The state tax is our calculation from Kentucky's published 2026 rules; it is an illustration, not a return.

These households also owe federal income tax, which is the same wherever they live. The tax bracket calculator and the guide to taxes in retirement cover that side.

As a comparative measure, Tax Foundation figures drawn from Census data put Kentucky property taxes at 0.74% of owner-occupied home value in 2024, which ranks 31st highest among the states. (Tax Foundation, Property Taxes by State and County, 2026 (comparative figures from Census ACS data))

The state’s own real property tax rate for 2026 is 10.3 cents per $100 of assessed value, down from 10.6 cents in 2025 and 12.2 cents as recently as 2020. On a home assessed at $400,000 the state portion is $412. (Kentucky Department of Revenue, Interest & Tax Rate Table, 1989 through 2026 (state real estate rate))

Most of a bill is local. Each county’s fiscal court sets a county rate and the local school board sets a school rate, and library, fire, extension and other districts may add their own. State law requires the state rate to fall whenever statewide real property assessments rise more than 4% in a year. Locally, a rate that would raise more than 4% in additional revenue from existing property requires a public hearing and can be challenged by a voter recall petition. (Kentucky Department of Revenue: Property Tax Rates)

The homestead exemption is the one statewide break for older owners. For the 2025 and 2026 assessment years it deducts $49,100 from the assessed value of a home owned and occupied by someone who is at least 65, or who is classified as totally disabled, before any property tax is computed. A home assessed at $200,000 is taxed as if it were worth $150,900. At the 2026 state rate that saves about $51 of state tax, and each $1.00 per $100 of combined local rates saves another $491. (Kentucky Department of Revenue: Homestead Exemption)

The amount is reset every two years for inflation; it was $46,350 for 2023 and 2024. The application goes to the county Property Valuation Administrator by December 31 of the tax year, and the home must be the owner’s primary residence on the January 1 assessment date. (Kentucky Department of Revenue: DOR Sets 2025-2026 Homestead Exemption (November 14, 2024))

Kentucky does not freeze assessments for older owners. A proposed constitutional amendment to exempt owners 65 and older from increases in the valuation of their permanent residence (2026 Senate Bill 51) passed the Senate 37 to 0 on January 22, 2026, but was not passed by the House, so it was not put to voters. (Kentucky General Assembly, 2026 Regular Session, Senate Bill 51: legislative record)

Kentucky’s sales and use tax is 6% of gross receipts or purchase price, and there are no local sales and use taxes. (Kentucky Department of Revenue: Sales & Use Tax)

As a comparative figure, the Tax Foundation puts Kentucky’s combined state and average local rate at 6.00% as of January 2026, which ranks 38th in the country. (Tax Foundation, State and Local Sales Tax Rates, 2026 (comparative figures))

Food and food ingredients for human consumption are exempt. The exemption does not cover candy, soft drinks, dietary supplements, alcoholic beverages, tobacco or prepared food, which are taxed at 6%. (Kentucky Revised Statutes 139.485, Exemption of food items)

Prescription drugs are exempt, as are over-the-counter drugs for which a prescription is issued, insulin and diabetic supplies bought for private use, and medical oxygen and oxygen delivery equipment for home use. (Kentucky Revised Statutes 139.472, Exemption for certain medical items)

Kentucky also taxes a long list of services at 6%, including landscaping and lawn care, residential cleaning, small animal veterinary care, pet grooming and boarding, household moving, cosmetic surgery, parking and extended warranties. (Kentucky Revised Statutes 139.200, Imposition of sales tax (rate and taxable services))

House Bill 8 of 2022 lengthened the list from January 1, 2023, adding among others photography, rental of space for weddings and other events, recreational and athletic instruction, personal fitness training, interior decorating, and repairs to clothing, watches and jewelry. (Kentucky Department of Revenue, Kentucky Sales Tax Facts, September 2022 (services taxable from January 1, 2023 under House Bill 8))

Kentucky has an inheritance tax and no estate tax. The inheritance tax is charged on what each beneficiary receives and depends on how they are related to the person who died. Class A beneficiaries (a surviving spouse, parents, children, grandchildren, brothers and sisters, including half-siblings) pay nothing. Class B beneficiaries (nieces, nephews, sons-in-law and daughters-in-law, aunts, uncles and great-grandchildren) get a $1,000 exemption and pay 4% to 16%. Class C covers everyone else, including cousins, friends and nieces and nephews by marriage, with a $500 exemption and rates of 6% to 16%. (Kentucky Department of Revenue: Inheritance & Estate Tax)

The top rate arrives quickly. A Class B share of $100,000 is taxed at $8,960, and the 16% rate applies above $200,000, where the tax is $22,960. A Class C share of $100,000 is taxed at $12,670, with 16% on everything above $60,000. Paying within nine months of the death earns a 5% discount; the return and payment are due within 18 months, after which interest runs. There has been no Kentucky estate tax since January 1, 2005. (Kentucky Department of Revenue, A Guide to Kentucky Inheritance and Estate Taxes (92F101, rev. 1-21))

All property of a Kentucky resident is subject to the tax except real estate in another state, and a nonresident’s real estate and personal property located in Kentucky is taxable. Gifts made within three years of death can be pulled back in. Life insurance appears on the department’s list of taxable property only when it is payable to the insured or to the estate. (Kentucky Department of Revenue, A Guide to Kentucky Inheritance and Estate Taxes (92F101, rev. 1-21))

Retirement accounts left to a Class B or Class C beneficiary have their own rule. The department’s March 2026 guidance says an inherited IRA is exempt only when it is paid as a series of substantially equal periodic payments over the beneficiary’s life or over at least 36 months after the death, with no more than 40% payable in any 12-month period. An IRA taken as a lump sum, left untouched, or drawn in unscheduled amounts is fully taxable. (Kentucky Department of Revenue, Kentucky Inheritance Tax presentation (March 16, 2026): KRS 140.063 and retirement accounts)

The federal estate tax applies in every state. The estate tax calculator estimates both the federal tax and any state tax.

The rate fell from 4% to 3.5% on January 1, 2026. Any further cut needs both a finding that the state’s revenue and reserve conditions were met and a vote of the General Assembly; the statute says the Department of Revenue cannot lower the rate on its own. The review of fiscal year 2024-2025 governs the rate for 2027 and the review of fiscal year 2025-2026 the rate for 2028; when the conditions are not met, the rate stays at 3.5%. From fiscal year 2027-2028 the law allows cuts in steps of 0.1 to 0.5 percentage points. (Kentucky Revised Statutes 141.020, Levy of income tax on individuals: rate, reduction conditions and tax credits)

On September 4, 2026 the Office of State Budget Director reported that the conditions for fiscal year 2025-2026 were not met under either the full test or the half-size test: general fund receipts of $15.98 billion fell $1.2 billion short of one and $453 million short of the other. The reserve test was met, with the budget reserve trust fund at 26.1% of receipts against a required 10%. (Kentucky Office of State Budget Director, report on the individual income tax reduction conditions for fiscal year 2025-2026 (September 4, 2026))

The year before, the conditions for fiscal year 2024-2025 were missed narrowly: the budget director’s August 15, 2025 report put general fund receipts $7.6 million below the required level. (Kentucky Office of State Budget Director, report on the individual income tax reduction conditions for fiscal year 2024-2025 (August 15, 2025))

The standard deduction rises to $3,470 for 2027, an increase of $110, under the Department of Revenue’s September 11, 2026 announcement. (Kentucky Department of Revenue: Kentucky DOR Announces 2027 Standard Deduction (September 11, 2026))

For taxable years beginning on or after January 1, 2026, itemizers can deduct home mortgage interest only on a principal residence, not on a second home. Kentucky also does not allow the federal deductions for qualified tips, qualified overtime pay or passenger vehicle loan interest. (Kentucky Revised Statutes 141.019, Calculation of adjusted gross income and net income (effective July 15, 2026))

A resident is an individual domiciled in Kentucky, or one who is not domiciled there but maintains a place of abode in the state and spends more than 183 days of the taxable year in it. A part-year resident is anyone who established or abandoned Kentucky residency during the calendar year. (Kentucky Revised Statutes 141.010, Definitions (resident, part-year resident))

Full-year residents file Form 740. People who move into or out of Kentucky during the year file Form 740-NP. A person who lives in Kentucky for more than 183 days of the year is treated as a resident, and the reciprocal agreements Kentucky has with other states do not apply to them. (Kentucky Department of Revenue, 2025 Kentucky Individual Income Tax Forms: Form 740 instructions, including Schedule M and Schedule ITC)

On Form 740-NP a part-year resident reports, and applies the pension income exclusion to, only the pension income received while a resident of Kentucky. (Kentucky Department of Revenue, Schedule P: Kentucky Pension Income Exclusion (2025), with instructions)

Under federal law (4 U.S.C. 114) a state cannot tax the retirement income of a person who is not its resident or domiciliary. A Kentucky state pension or a 401(k) built during a Kentucky career is taxed only by the state where the retiree lives when it is paid, and a pension earned elsewhere becomes eligible for the Kentucky exclusion once the retiree lives there. (4 U.S.C. 114, Limitation on State income taxation of certain pension income)