Kentucky does have a state income tax

Kentucky residents pay state income tax on wages, investment income, and other earnings. The state tax rate is a flat 5.85% on most income, meaning everyone pays the same percentage regardless of how much they earn. This is separate from the federal income tax you owe to the IRS.

Kentucky's income tax applies to residents and part-year residents who earned money in the state. If you work in Kentucky but live in another state, you may owe Kentucky tax on that income depending on your situation and the other state's rules. The state also taxes certain types of income differently — for example, retirement income and investment income have their own rules.

Key Takeaways

  • Kentucky's flat income tax rate is 5.85% on most wages and salary income.
  • You pay Kentucky income tax if you are a resident or earned money in Kentucky during the tax year.
  • Retirement income, including Social Security and pensions, is generally not taxed by Kentucky.
  • You file Kentucky taxes using Form 740, which you submit to the Kentucky Department of Revenue.
  • Your employer typically withholds Kentucky income tax from your paycheck automatically.

Who has to pay Kentucky income tax

You owe Kentucky income tax if you are a resident of the state or if you earned income in Kentucky during the tax year. A resident is someone who lived in Kentucky for the entire tax year or moved to the state during the year with the intent to stay. If you moved to Kentucky partway through the year, you are considered a part-year resident and owe tax only on income earned after you arrived.

If you work in Kentucky but live in another state, you generally owe Kentucky tax on the wages you earned there. However, some states have reciprocal agreements with Kentucky that may reduce or eliminate this tax. For example, if you live in Indiana or Ohio and work in Kentucky, you may be able to claim a credit or exemption. Check with your employer's payroll department or the Kentucky Department of Revenue to understand your specific situation.

What income is taxed at the 5.85% rate

The 5.85% flat rate applies to wages, salaries, bonuses, and most other earned income. It also applies to interest, dividends, and capital gains — the money you make from investments. Self-employment income is taxed at this rate as well, though self-employed people also owe federal self-employment tax.

Some types of income are not subject to Kentucky tax at all. Social Security benefits, pensions, and retirement distributions from IRAs and 401(k) plans are generally exempt from state tax. Military retirement pay is also exempt. If you receive income from sources outside Kentucky, such as out-of-state rental property or a business in another state, you may still owe Kentucky tax on it if you are a Kentucky resident.

How withholding works on your paycheck

Your employer withholds Kentucky income tax from your paycheck automatically, just like federal tax withholding. The amount withheld depends on the information you provide on Form W-4, which you fill out when you start a job. The form tells your employer how much to hold back based on your filing status and the number of dependents you claim.

If you think too much or too little is being withheld, you can update your W-4 at any time. Submitting a new form to your payroll department takes effect on your next paycheck. If you have multiple jobs or receive income from sources where no tax is withheld, you may need to adjust your withholding to avoid owing a large amount when you file your return.

Filing your Kentucky tax return

You file Kentucky state taxes using Form 740, the Kentucky Individual Income Tax Return. You submit this form to the Kentucky Department of Revenue, either by mail or electronically through the state's online filing system. The important date to file is the same as the federal important date — typically April 15 of the year following the tax year you are reporting.

You must file a Kentucky return if your income exceeds the filing threshold set by the state each year. The threshold varies depending on your age and filing status. Even if you do not have to file, you may want to file anyway if you had taxes withheld during the year, because filing allows you to claim a refund of any overpayment. Kentucky also offers free tax preparation help through the Volunteer Income Tax information (VITA) program if your income is below a certain level.

Deductions and credits available in Kentucky

Kentucky allows you to claim the standard deduction, which reduces the amount of income subject to tax. The standard deduction amount changes each year and depends on your age and filing status. If you are 65 or older, you may may have access to for an additional standard deduction.

The state also offers several tax credits that can lower your tax bill. The Earned Income Tax Credit (EITC) is available to low- and moderate-income workers and is based on your federal EITC. Kentucky also has credits for child and dependent care expenses, education expenses, and other situations. Some credits are refundable, meaning you can receive money back even if you owe no tax. Review the instructions that come with Form 740 or contact the Kentucky Department of Revenue to see which credits explore to your situation.

What happens if you move out of Kentucky

If you move out of Kentucky during the tax year, you are considered a part-year resident and owe Kentucky tax only on income earned while you lived in the state. You file Form 740-NR (Nonresident or Part-Year Resident Individual Income Tax Return) instead of the regular Form 740. This form requires you to report your income by the dates you were a resident and a nonresident.

Your employer may not automatically know you moved, so you should notify payroll and submit a new W-4 to your new employer. If you moved to a state with no income tax, you will not owe tax to that state, but you still owe Kentucky tax on income earned before you left. If you moved to another state with income tax, you may owe tax to both states, though you can usually claim a credit on your Kentucky return for taxes paid to the other state to avoid double taxation.

Frequently Asked Questions

Is Social Security taxed in Kentucky?

No. Kentucky does not tax Social Security benefits. If Social Security is your only income, you will not owe Kentucky state tax. However, if you have other income above certain thresholds, some of your Social Security may be taxed at the federal level.

Do I owe Kentucky tax if I work remotely for a company in another state?

If you live and work in Kentucky, even if your employer is based elsewhere, you owe Kentucky tax on your wages. If you live in another state and work remotely for a Kentucky company, you generally owe tax to your home state, not Kentucky. Some states have agreements that affect this — check with your employer or the Kentucky Department of Revenue about your specific situation.

What is the penalty for not filing a Kentucky tax return?

Penalties vary depending on how late you file and how much tax you owe. The Kentucky Department of Revenue charges interest on unpaid taxes and may assess a failure-to-file penalty if you do not submit your return by the important date. If you cannot file by April 15, you can request an extension, which gives you additional time to file without penalty.

Can I file my Kentucky return electronically?

Yes. The Kentucky Department of Revenue accepts electronic returns through its online filing system and through approved tax software providers. E-filing is often faster than mailing a paper return and can speed up your refund if you are owed one.

Do I have to file if I had no income during the year?

No, you do not have to file if your income is below the filing threshold for your age and filing status. However, if you had taxes withheld from a job or other income source, filing allows you to claim a refund of that money.