Kentucky does have a state income tax

Kentucky taxes wage income, investment income, and retirement distributions. The state does not tax Social Security benefits, but it does tax other forms of retirement income including distributions from 401(k)s, IRAs, and pensions. Kentucky's income tax rates range from 2% to 5.75% depending on your income bracket, and the state uses a progressive tax system where higher earners pay a higher percentage.

Unlike some states that tax only certain types of income, Kentucky applies its income tax broadly to most sources of earned and unearned income. This means if you work in Kentucky, receive a pension, or withdraw from a retirement account, you will owe state income tax on that money unless a specific exemption applies.

Key Takeaways

  • Kentucky's state income tax rates range from 2% to 5.75% across six tax brackets, with rates increasing as income rises.
  • Social Security benefits are not taxed in Kentucky, but pension income, 401(k) withdrawals, and IRA distributions are subject to state income tax.
  • Kentucky taxes both wages and investment income such as interest, dividends, and capital gains at the same rates as ordinary income.
  • The state offers a limited number of deductions and credits, including a dependent exemption and a child and dependent care credit.

Kentucky's income tax brackets and rates

Kentucky uses six tax brackets. The lowest rate of 2% applies to the first portion of taxable income, and the rate increases with each bracket until reaching 5.75% on the highest incomes. The exact income thresholds for each bracket change annually based on inflation adjustments, so the dollar amounts that trigger each rate are different each year.

To find the current year's brackets, you can check the Kentucky Department of Revenue website or your tax software, which will have the updated thresholds. Because Kentucky adjusts brackets yearly, the income level at which you move from one bracket to the next is not fixed.

What types of income Kentucky taxes

Kentucky taxes wages, salaries, and self-employment income. It also taxes interest earned on savings accounts and certificates of deposit, dividends from stocks and mutual funds, and capital gains from selling investments at a profit. All of these are taxed at your ordinary income tax rate — there is no preferential rate for long-term capital gains in Kentucky.

Retirement account distributions are taxed as ordinary income. If you withdraw money from a traditional 401(k), traditional IRA, or pension plan, that withdrawal is subject to Kentucky state income tax. Roth IRA withdrawals of contributions (the money you put in) are not taxed, but earnings withdrawn before age 59½ may be taxed.

One major exception is Social Security benefits. Kentucky does not tax Social Security retirement, survivor, or disability benefits, regardless of your total income. This is one of the few income sources that receives preferential treatment under Kentucky tax law.

Deductions and credits available in Kentucky

Kentucky allows a dependent exemption, which reduces your taxable income by a set amount for each dependent you claim. The exemption amount changes annually. You can also claim the federal standard deduction or itemize deductions if you choose to itemize on your federal return.

The state offers a child and dependent care credit for expenses you pay for childcare while you work. Kentucky also has credits for taxes paid to other states if you worked in multiple states during the year, which prevents you from being taxed twice on the same income. Some taxpayers may also be able to claim a credit for property taxes paid.

How to file Kentucky state income tax

You file Kentucky state income tax using Form 740, the Kentucky Individual Income Tax Return. This form is filed separately from your federal return. You can file by mail, electronically through the Kentucky Department of Revenue website, or through tax software that supports Kentucky returns.

If you owe Kentucky income tax, the filing important date is the same as the federal important date — typically April 15 of the year following the tax year. If you expect a refund, filing earlier can speed up the refund process. Kentucky also allows electronic filing, which is generally faster than mailing a paper return.

Who must file a Kentucky return

You must file a Kentucky return if your income exceeds the threshold set by the state for your filing status. The threshold varies depending on whether you are single, married filing jointly, head of household, or another status. Generally, if you are required to file a federal return, you will also need to file a Kentucky return.

Even if you do not owe Kentucky income tax, you may want to file if you had taxes withheld from your paychecks or if you are due a refund from credits. Filing allows you to recover any overpayment.

Frequently Asked Questions

Does Kentucky tax retirement income like pensions and 401(k) withdrawals?

Yes. Kentucky taxes distributions from 401(k)s, traditional IRAs, and pension plans as ordinary income at your regular tax rate. The only major retirement income that is not taxed is Social Security benefits. If you receive a pension or withdraw from a retirement account, you will owe Kentucky state income tax on that money.

Is Social Security taxed in Kentucky?

No. Kentucky does not tax Social Security retirement, survivor, or disability benefits. This is true regardless of how much other income you have. Social Security is one of the few income sources that receives this exemption.

What is the highest tax rate in Kentucky?

The highest Kentucky state income tax rate is 5.75%, which applies to the highest income bracket. Kentucky uses a progressive system, so you only pay the higher rate on income that falls within that bracket, not on all your income.

Can I deduct federal income taxes paid on my Kentucky return?

No. Kentucky does not allow you to deduct federal income taxes paid. You can deduct state and local property taxes up to a limit, and you can claim the federal standard deduction or itemize deductions if you choose to itemize on your federal return.

Do I have to file a Kentucky return if I only have Social Security income?

No. Since Kentucky does not tax Social Security benefits, if Social Security is your only income, you do not have to file a Kentucky return. You would only need to file if you have other income that exceeds the filing threshold for your status.