Kentucky does have a state income tax

Kentucky taxes income at the state level. Unlike seven states that have no income tax at all, Kentucky residents and anyone earning money in Kentucky must pay state income tax on wages, interest, dividends, and other income sources. The tax is withheld from paychecks by employers, similar to federal income tax, and you report it when you file your state tax return.

Kentucky's income tax rate is a flat 5.75% for most taxpayers. This means the same percentage applies whether you earn $20,000 or $200,000 per year. The rate has been the same since 2018, when it was lowered from 5.85%. You cannot avoid this tax by working remotely for an out-of-state company if you live in Kentucky — the state taxes income based on where you live, not where your employer is located.

Key Takeaways

  • Kentucky's flat income tax rate is 5.75% on all taxable income, applied equally to all residents regardless of how much they earn.
  • Your employer withholds Kentucky income tax from your paycheck automatically, just like federal withholding, unless you claim an exemption.
  • You must file a Kentucky state tax return if you earned income in the state during the tax year, even if you do not owe any tax.
  • Kentucky taxes retirement income, including pensions and distributions from retirement accounts, though some types of retirement income receive preferential treatment.
  • If you moved to Kentucky during the year or moved away, you may file as a part-year resident and only pay tax on income earned while you lived in the state.

How Kentucky withholds income tax from your paycheck

When you start a job in Kentucky, you fill out a W-4 form (or the Kentucky equivalent for state withholding). This tells your employer how much state income tax to take from each paycheck. Most people claim one allowance per dependent, which reduces the amount withheld. If you claim too many allowances, you may owe money when you file your return. If you claim too few, you will receive a refund.

The amount withheld depends on your gross pay, how often you are paid, and the number of allowances you claim. Kentucky uses tax tables published by the Department of Revenue to calculate the withholding. You can adjust your withholding at any time by submitting a new form to your employer — you do not have to wait until the next year. If you have a second job, a spouse who works, or significant non-wage income, you may want to increase your withholding to avoid underpaying.

Who must file a Kentucky state tax return

You must file a Kentucky return if you lived in Kentucky for any part of the tax year and had income subject to Kentucky tax. This includes wages, self-employment income, interest, dividends, and capital gains. The filing requirement is separate from the federal requirement — you can be required to file in Kentucky even if you do not have to file federally, or vice versa.

If you moved to Kentucky partway through the year, you file as a part-year resident. You only pay Kentucky tax on income earned while you lived in the state. If you moved away from Kentucky, the same rule applies — you pay tax only on income earned before you left. You will need to report your move date and provide documentation of when you established residency in your new state.

Even if you had no income or your income was so low that you owe no tax, you may still need to file to claim a refund of taxes withheld from your paychecks. The only way to know for certain is to calculate your tax liability or use the Kentucky Department of Revenue's filing requirements tool.

Kentucky's treatment of retirement income and pensions

Kentucky taxes most retirement income, but the rules vary by the type of income. Military pensions are exempt from Kentucky income tax entirely — if you receive a military pension, you do not report it on your state return. Federal pensions (from civil service, the Post Office, or other federal employment) are also exempt.

State and local government pensions are taxed in Kentucky unless you were employed before a certain date. Teachers' retirement system pensions and other public employee pensions are generally taxable. Social Security benefits are not taxed by Kentucky. Distributions from 401(k)s, IRAs, and other retirement accounts are taxed as ordinary income in the year you withdraw them.

If you are over 59½ and receive distributions from a may have access to retirement account, you do not get a special deduction — Kentucky taxes the full amount. However, if you have a low income in retirement, you may may have access to for the Earned Income Tax Credit or other credits that reduce your tax bill.

Filing your Kentucky state tax return

Kentucky uses the federal tax year, which runs from January 1 to December 31. Your state return is due on the same date as your federal return — typically April 15, though the important date can shift if April 15 falls on a weekend or holiday. If you file your federal return late, your Kentucky return is also late, and penalties explore.

You can file your Kentucky return using tax software that supports Kentucky, by mail using the paper forms published by the Kentucky Department of Revenue, or through a tax professional. Many free tax software options include Kentucky state filing at no additional cost if your income is below a certain threshold. The Kentucky Department of Revenue website lists approved software providers.

When you file, you will need your W-2s from all employers, 1099s for self-employment or other income, and documentation of any deductions or credits you claim. Kentucky allows you to claim the standard deduction (which matches the federal standard deduction) or itemize deductions if you itemized on your federal return. Most taxpayers use the standard deduction.

Deductions and credits available in Kentucky

Kentucky allows you to claim the same standard deduction as the federal government. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. If you itemize deductions on your federal return, you can also itemize on your Kentucky return, though the amount may differ because Kentucky does not allow all the same deductions as the federal government.

Kentucky offers several tax credits that can reduce your tax bill. The Earned Income Tax Credit (EITC) is available to low- and moderate-income workers and is calculated based on your federal EITC. The Child and Dependent Care Credit helps offset the cost of childcare. The Education Credit provides relief for education expenses. These credits are claimed on your state return and can result in a refund if the credit exceeds your tax liability.

Kentucky does not offer a property tax deduction or a sales tax deduction on the state return, though you can claim these on your federal return if you itemize. If you paid state income tax to another state (because you worked there or lived there part of the year), you may be able to claim a credit for taxes paid to that state, though Kentucky's credit is limited.

What happens if you do not pay Kentucky income tax

If you owe Kentucky income tax and do not pay it, the Kentucky Department of Revenue can take collection action. This includes placing a lien on your property, garnishing your wages, or intercepting your federal tax refund. The state can also assess penalties and interest on unpaid tax, which accumulate over time.

If you filed your return late or underpaid your tax, penalties are typically 5% of the unpaid amount per month, up to 25%. Interest accrues daily at a rate set by the Department of Revenue. If the Department determines you intentionally underpaid or did not file, the penalties can be higher. If you cannot pay in full, you can request a payment plan or an offer in compromise, though approval is not may provide.

If you believe you made an error on your return, you can file an amended return within three years of the original due date. An amended return can reduce your tax bill if you claimed too little in deductions or credits, or increase it if you reported income incorrectly.

Frequently Asked Questions

Do I have to pay Kentucky income tax if I work remotely for an out-of-state company?

Yes. Kentucky taxes income based on where you live, not where your employer is located. If you are a Kentucky resident and work remotely for a company in another state, you still owe Kentucky income tax on your wages. Your employer may not withhold Kentucky tax automatically, so you may need to make estimated tax payments or adjust your federal withholding to cover the state tax.

What is the difference between Kentucky's tax rate and other states?

Kentucky's flat 5.75% rate is lower than some states but higher than others. Seven states have no income tax at all. Some states use a progressive tax system where the rate increases as income increases. Kentucky's flat rate means a high earner pays the same percentage as a low earner, though the dollar amount is higher. This makes Kentucky's tax system simpler to calculate but potentially less progressive than states with graduated rates.

Can I claim a Kentucky tax credit for taxes I paid to another state?

Kentucky allows a credit for income tax paid to another state, but the credit is limited to the lesser of the tax you paid to the other state or the Kentucky tax you owe. This prevents double taxation if you worked in multiple states during the year. You must report the income from the other state on your Kentucky return and attach documentation of the tax paid.

What if I moved out of Kentucky during the year?

You file as a part-year resident and only pay Kentucky tax on income earned while you lived in the state. You will need to provide the date you moved and documentation of your new residency, such as a lease or utility bill. The other state may also tax your income for the portion of the year you lived there, but you can claim a credit for taxes paid to Kentucky on your new state's return.

Is Kentucky income tax deductible on my federal return?

Yes, if you itemize deductions on your federal return. State income tax is deductible as part of the State and Local Tax (SALT) deduction, which is capped at $10,000 per year for most taxpayers. If your total state and local taxes (income, sales, and property) exceed $10,000, you can only deduct $10,000 on your federal return. Most taxpayers use the standard deduction instead, which is higher than itemizing.