Kentucky — Personal Income Tax

Kentucky imposes a personal income tax on residents, part-year residents, and nonresidents with Kentucky-source income. The current tax rate is 3.5 percent for taxable years beginning on or after January 1, 2026. The rate was reduced from 4 percent pursuant to House Bill 1, enacted during the 2025 Regular Session.

Source: KRS 141.020

Source: Kentucky Department of Revenue, Individual Income Tax

## Residency Status

Resident. A resident is either (1) an individual domiciled in Kentucky, or (2) an individual not domiciled in Kentucky who maintains a place of abode in Kentucky and spends in the aggregate more than 183 days of the taxable year in Kentucky. Residents are taxed on all income regardless of source.

Source: KRS 141.010

Source: 103 KAR 17:010

Part-year resident. A part-year resident is an individual who moved into or out of Kentucky during the taxable year. Part-year residents are subject to tax on all income during the portion of the year they were Kentucky residents and on Kentucky-source income during the portion of the year they were nonresidents.

Source: KRS 141.020(6)

Nonresident. A nonresident is taxable only on Kentucky-source income, which includes income from labor performed in Kentucky, business conducted in Kentucky, tangible property located in Kentucky, and intangible property that has acquired a business situs in Kentucky.

Source: KRS 141.020(4)

## Domicile Principles

Domicile means the place where an individual has established permanent residency. A domicile once obtained continues until a new domicile is acquired. Domicile is not changed by removal for a definite period or for incidental purposes. To constitute a change of domicile, there must be intent to change, actual removal, and a new abode.

Source: 103 KAR 17:010, Section 1 and Section 3

## Filing Requirements

Full-year residents must file Form 740 if both of the following are met: (1) modified gross income exceeds the federal poverty level threshold for family size (e.g., $15,650 for family size of one for recent tax years), and (2) Kentucky adjusted gross income exceeds thresholds that vary by filing status and age. For tax year 2025, the Kentucky adjusted gross income threshold is $3,270 for a single filer under age 65, and $4,270 for a single filer age 65 or over (not blind). For tax year 2026, these thresholds increase to $3,360 and $4,360, respectively. See the Filing Threshold Variations by Age and Blindness Status section for complete threshold tables.

Source: Kentucky Form 740 Instructions (2025).pdf)

Part-year residents and nonresidents file Form 740-NP.

Source: Kentucky Department of Revenue, Individual Income Tax

Self-employed individuals who are Kentucky residents must file a return regardless of the amount of Kentucky adjusted gross income if gross receipts from self-employment exceed the modified gross income threshold.

Source: Kentucky Form 740 Instructions (2025).pdf)

## Special Rules

Military personnel retain the domicile they had when entering military service. Kentucky residents at the time of induction remain liable for Kentucky income tax on all income regardless of where military services are performed, but active-duty military pay is exempt from Kentucky income tax.

Source: 103 KAR 17:010, Section 6

Reciprocal agreements. Kentucky has reciprocal tax agreements with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, and Wisconsin. Wages and salaries earned in Kentucky by residents of those states are exempt from Kentucky income tax, and Kentucky residents are exempt from income tax on wages and salaries earned in those states. The Virginia agreement applies only to taxpayers who commute daily.

Source: 103 KAR 17:010, Section 7

Kentucky imposes a flat tax on net income for individuals. The tax rate has declined over several years due to legislation enacted in 2022, 2023, and most recently in the 2025 Regular Session.

For taxable years beginning on or after January 1, 2026, the personal income tax rate is 3.5 percent of net income. This reduction was implemented by House Bill 1 during the 2025 Regular Session and reflects the current scheduled rate in Kentucky Revised Statutes § 141.020.

For taxable years beginning on or after January 1, 2024, and before January 1, 2026, the rate is 4 percent.

For taxable years beginning on or after January 1, 2023, and before January 1, 2024, the rate was 4.5 percent.

Legislation also put in place a mechanism allowing further annual reductions in the income tax rate, contingent on fiscal triggers involving the Budget Reserve Trust Fund balance and General Fund revenues. Each year, the Office of State Budget Director reviews these conditions, and if the statutory requirements are met, the General Assembly may approve an additional rate decrease for subsequent taxable years.

The rate schedule and reduction mechanism are explicitly enumerated in KRS 141.020(2)(c). The statute was most recently amended in 2025, and the effective 3.5 percent rate applies to tax years beginning January 1, 2026 and going forward, unless additional legislative changes are enacted.

Source: KRS 141.020(2)(c)

Kentucky's filing requirement for full-year residents depends in part on whether the taxpayer's Kentucky adjusted gross income exceeds a threshold amount that varies based on the taxpayer's age and blindness status. These thresholds—referred to in the Form 740 Instructions as Chart B—increase for taxpayers age 65 or older and for taxpayers who are blind.

## Single Filers

For tax year 2025, a single filer must file if Kentucky adjusted gross income exceeds:

• $3,270 if under age 65 and not blind
• $4,270 if age 65 or over, or blind (but not both)
• $5,270 if age 65 or over and blind

For tax year 2026, based on the announced standard deduction of $3,360, the corresponding thresholds are:

• $3,360 if under age 65 and not blind
• $4,360 if age 65 or over, or blind (but not both)
• $5,360 if age 65 or over and blind

## Married Taxpayers Filing Jointly or on a Combined Return

For tax year 2025, married taxpayers filing jointly or on a combined return must file if Kentucky adjusted gross income exceeds:

• $3,270 if both spouses are under age 65
• $4,270 if one spouse is age 65 or over
• $5,270 if both spouses are age 65 or over

For tax year 2026, based on the announced standard deduction of $3,360, the corresponding thresholds are:

• $3,360 if both spouses are under age 65
• $4,360 if one spouse is age 65 or over
• $5,360 if both spouses are age 65 or over

The married-taxpayer thresholds in Chart B apply regardless of whether one or both spouses are blind, although the instructions do not explicitly state separate blindness adjustments for married filers.

## Threshold Structure and Relationship to Standard Deduction

Chart B filing thresholds track the standard deduction amount. The base threshold (under age 65, not blind) equals the standard deduction ($3,270 for 2025; $3,360 for 2026). The age-65-or-blind threshold adds $1,000 to the base. The age-65-and-blind threshold adds $2,000 to the base. This structure mirrors the federal additional standard deduction amounts for age and blindness, though Kentucky's base standard deduction amount differs from the federal amount.

## Interaction with Modified Gross Income Threshold

Meeting the Kentucky adjusted gross income threshold in Chart B is not sufficient by itself to trigger a filing requirement. Full-year residents must also meet the modified gross income threshold in Chart A, which is based on family size and corresponds to the federal poverty level. For tax year 2025, the modified gross income thresholds are $15,650 (family size of one), $21,150 (family size of two), $26,650 (family size of three), and $32,150 (family size of four or more).

A return is required only if both the modified gross income threshold (Chart A) and the Kentucky adjusted gross income threshold (Chart B) are exceeded.

## Annual Adjustment

The Kentucky adjusted gross income filing thresholds in Chart B are indexed to the standard deduction amount, which is adjusted annually for inflation under KRS 141.081(2)(a). The Department of Revenue publishes the updated amounts each year, typically in the late summer or early fall for the following tax year.

Source: Kentucky Form 740 Instructions (2025).pdf)

Source: Kentucky Department of Revenue, Kentucky DOR Announces 2026 Standard Deduction (September 4, 2025)

Source: KRS 141.081

Kentucky individual income tax returns are due on or before the 15th day of the fourth month following the close of the taxable year. For calendar-year filers, the deadline is April 15. Kentucky automatically grants a six-month extension to file if a federal extension is filed; no separate Kentucky extension form is required. The extension applies only to filing, not to payment of tax owed, which remains due by the original deadline.

Source: Kentucky Form 740 Instructions.pdf)

Kentucky allows taxpayers to elect a standard deduction in lieu of itemizing deductions. The standard deduction amount is adjusted annually for inflation pursuant to KRS 141.081(2)(a).

## Tax Year 2026

For taxable year 2026, the standard deduction is $3,360. The Kentucky Department of Revenue announced this amount on September 4, 2025, representing a $90 increase from the 2025 amount. The $3,360 deduction is incorporated into the Department's 2026 withholding formula and 2026 tax forms.

## Tax Year 2025

For taxable year 2025, the standard deduction is $3,270.

## Filing Status and Joint Filers

The standard deduction is a flat amount that does not vary by filing status. Married couples filing jointly receive only one standard deduction—the joint standard deduction is the same $3,360 for tax year 2026 (or $3,270 for tax year 2025), not a doubled amount.

## Itemizing Alternative

Taxpayers may instead elect to itemize deductions under federal rules as modified by Kentucky law. If one spouse itemizes deductions, the other must also itemize when filing jointly or separately on a combined return.

## Interaction with Tax Calculation

The standard deduction reduces Kentucky adjusted gross income to arrive at Kentucky taxable income, to which the flat tax rate is then applied (3.5% for taxable year 2026; 4% for taxable year 2025).

Source: KRS 141.081

Source: Kentucky Department of Revenue, Kentucky DOR Announces 2026 Standard Deduction (September 4, 2025)

Source: Kentucky Department of Revenue, 2026 Kentucky Withholding Tax Formula

Source: Kentucky Form 740 Instructions (2025).pdf)

Direct answer A Kentucky employer is not required to withhold Kentucky income tax from wages paid to a nonresident employee for services performed entirely outside Kentucky, provided the employee never physically works in Kentucky and is not a Kentucky resident.

Why Kentucky’s administrative regulation 103 KAR 18:010, Section 2 distinguishes between withholding obligations for resident and nonresident employees. For nonresidents, the employer must withhold Kentucky income tax only if the wages are for services performed in Kentucky. If a nonresident employee performs all work remotely outside Kentucky, those wages are not considered Kentucky-source, and employer withholding is not required. There are no Kentucky withholding or related registration/return obligations triggered solely by the act of paying employees who never physically work in Kentucky and are not residents (so long as the employer has no other Kentucky business activities).

There is one narrow exception under reciprocity: Kentucky’s reciprocal agreements concern residents of reciprocating states who work in Kentucky (not out-of-state remote work); these do not impose a Kentucky withholding requirement for nonresidents working outside Kentucky.

Source support

• Authority: 103 KAR 18:010 § 2 — Kentucky employer must withhold tax from nonresidents’ wages only for services performed in Kentucky; no requirement for wholly out-of-state work.

Caution / review status Not yet human confirmed. This answer applies if the employee is not a Kentucky resident, performs no services in Kentucky, and the employer has no other Kentucky nexus. If any of those factors change, review additional requirements.

Kentucky provides a nonrefundable family size tax credit for qualifying taxpayers whose modified gross income is below 133 percent of the threshold amount based on the federal poverty level. The credit reduces Kentucky income tax liability but cannot reduce it below zero. The credit is applied against the tax liability calculated under KRS 141.020.

## Threshold Amount

The threshold amount is the federal poverty level for the taxpayer's family size, determined by reference to the Health and Human Services poverty guidelines available on June 30 of the taxable year under 42 U.S.C. § 9902(2). For taxable year 2025, the threshold amounts are:

• Family size of one: $15,650
• Family size of two: $21,150
• Family size of three: $26,650
• Family size of four or more: $32,150

Family size is determined by the number of qualifying dependents as defined in Internal Revenue Code Section 152(c), plus the taxpayer(s). A qualifying dependent includes a qualifying child who lives in the household but cannot be claimed as a dependent if the provisions of IRC Section 152(e)(2) or 152(e)(4) apply (typically referring to children of divorced or separated parents where the noncustodial parent claims the dependency exemption).

## Credit Amount

For modified gross income at or below 100% of the threshold amount: The family size tax credit equals the taxpayer's entire tax liability—effectively reducing Kentucky income tax to zero.

For modified gross income between 100% and 133% of the threshold amount: The credit equals a percentage of the taxpayer's tax liability. The percentage phases out in steps based on modified gross income:

1. 100% to 104% of threshold: Credit reduces tax by a fixed dollar amount:

• $11 for family size of one
• $7 for family size of two
• $3 for family size of three

1. 104% to 108% of threshold: Credit reduces tax by:

• $20 for family size of one
• $13 for family size of two
• $6 for family size of three

1. 108% to 112% of threshold: The statute continues a similar phase-out structure with additional tiers through 133% of the threshold amount.

For modified gross income at or above 133% of the threshold amount: No credit is allowed.

## Filing Status Rules

For married couples filing jointly, the family size tax credit is computed on the basis of joint modified gross income and applied against joint tax liability.

For married couples living together who file separate returns or file separately on a combined return, the family size tax credit is computed on the basis of their combined modified gross income (with any separately computed modified gross income of less than zero treated as zero) and is applied against their combined tax liability.

## Modified Gross Income

The credit is based on modified gross income, not Kentucky adjusted gross income. Modified gross income is defined at KRS 141.010 and generally equals the greater of (a) adjusted gross income under federal law, or (b) adjusted gross income with certain add-backs such as tax-exempt interest from non-Kentucky municipal bonds, lump-sum distributions, and certain other items.

## Effective Date

The family size tax credit has been in effect for taxable years beginning after December 31, 2004. The threshold amounts are updated annually to reflect federal poverty guidelines.

Source: KRS 141.066

Source: Kentucky Form 740-NP Instructions (2025).pdf)

For taxable years beginning after December 31, 2004, Kentucky’s nonrefundable Family Size Tax Credit phases out in tiers when a taxpayer’s modified gross income (MGI) exceeds the threshold amount; between 112% and 133% of the threshold, the credit declines from 60% to 10% of the taxpayer’s liability according to statutory brackets.

Statutory Phase-Out Brackets Under KRS 141.066(c), the Family Size Tax Credit is computed as a percentage of the taxpayer’s Kentucky individual income tax liability (as calculated under KRS 141.020), with specific statutory percentages for each bracket above the threshold amount:

• Over 112% up to and including 116% of threshold: credit equals 60% of liability
• Over 116% up to and including 120%: 50%
• Over 120% up to and including 124%: 40%
• Over 124% up to and including 127%: 30%
• Over 127% up to and including 130%: 20%
• Over 130% up to and including 133%: 10%

Taxpayers with MGI greater than 133% of the family-size threshold are not eligible for any Family Size Tax Credit. These bracketed percentages apply to the preliminary tax liability, prior to the application of other credits.

The threshold amount (representing 100% MGI for the applicable family size) is determined by reference to federal poverty guidelines and is updated annually, but the phase-out percentages above 112% remain fixed by statute.

Source: KRS 141.066(c)

Not yet human confirmed. This section covers statutory phase-out percentages only. Annual threshold amounts for each family size must be obtained from the DOR’s current year Form 740 instructions or worksheet.

Direct answer

Kentucky law requires withholding on certain non‑wage payments beyond standard wages, specifically: (1) distributive shares of pass‑through entities paid to nonresident persons; (2) supplemental wages (including vacation pay) and unemployment benefits when withholding is elected; and (3) gambling winnings—each under distinct statutory or regulatory authority. There is no primary authority requiring withholding on pension distributions or nonemployee compensation.

Why

Pass‑through entity distributions: Kentucky Revised Statutes (KRS) 141.206(4)–(5)(a) mandates that a pass‑through entity must withhold Kentucky income tax at the maximum rate provided in KRS 141.020 on the distributive share—whether distributed or undistributed—of each nonresident individual partner, member, or shareholder.

Supplemental wages, vacation pay, and unemployment benefits: Administrative Regulation 103 KAR 18:070 requires withholding on supplemental wages (including vacation pay), and, if the employee elects, on unemployment benefits. Every payment of gambling winnings must also be withheld at the maximum KRS 141.020 rate.

What is not covered: A search of the Kentucky Revised Statutes, administrative regulations, and official Kentucky DOR forms and instructions as of 2026-06-16 did not uncover any requirement for withholding on pension distributions or payments to independent contractors (nonemployee compensation). This absence of authority suggests that such withholding is not mandated under Kentucky law.

Source support

• Authority: KRS 141.206(4)–(5)(a) — pass‑through entity distributive‑share withholding at maximum rate (KRS 141.206).
• Authority: 103 KAR 18:070 — withholding on supplemental wages, vacation pay, unemployment benefits, and gambling winnings at maximum rate (103 KAR 18:070).

Caution / review status

Not yet human confirmed. Although the withholding categories listed are clearly authorized, the conclusion that pensions and nonemployee compensation are not subject to withholding is based on a negative—absence of statutory or regulatory authority. A human reviewer should verify that no niche provisions (e.g., backup withholding in specific contexts) apply under Kentucky’s revenue code or internal DOR guidance.

Kentucky does not apply a “convenience of the employer” rule. Nonresidents are subject to Kentucky income tax and withholding only for services performed within Kentucky. Remote work performed entirely outside Kentucky is not sourced to Kentucky and is therefore not taxable or subject to withholding—unless an exception applies under a reciprocal withholding agreement.

Sourcing for nonresidents KRS § 141.020(4) provides that a nonresident individual is taxable only on income from labor performed, business done, or other activities in this state; income from sources outside Kentucky is not taxable by the Commonwealth. Source: KRS 141.020

Administrative clarification 103 KAR 17:060, section 4(1) reiterates that a nonresident’s net income is subject to Kentucky income tax only if it is derived from services performed in Kentucky, property in Kentucky, or income from pass-through entities doing business in Kentucky. Income from sources outside Kentucky is not taxable. Source: 103 KAR 17:060 § 4(1)

Withholding rules (updated 2026 rates) Under 103 KAR 18:010, employers must withhold Kentucky income tax on wages paid to nonresidents only for services rendered in Kentucky. Wages for services performed outside Kentucky are not subject to withholding—unless a reciprocal agreement applies and the employee submits the proper exemption certificate. For taxable year 2026, the withholding rate is 3.5 percent, reduced from 4 percent in prior years, as implemented per legislative changes enacted for tax years beginning January 1, 2026. DOR publications and the employer payroll withholding tables for 2026 reflect this updated rate. Source: 103 KAR 18:010 § 2 Source: Kentucky Department of Revenue — Employer Payroll Withholding

No convenience-of-the-employer rule Kentucky does not adopt a “convenience of the employer” sourcing rule that would tax remote work performed outside Kentucky. The statutory and regulatory framework consistently ties sourcing and withholding to the physical location of performance.

Source: KRS 141.020 Source: 103 KAR 17:060 Source: 103 KAR 18:010 Source: Kentucky Department of Revenue — Employer Payroll Withholding

Not yet human confirmed. This update reflects the reduction in Kentucky’s employer withholding rate from 4 percent to 3.5 percent for tax years beginning Jan. 1, 2026, per DOR guidance. No changes were identified to Kentucky’s reciprocity rules, nonresident sourcing definitions, or the absence of a "convenience of the employer" doctrine. All sources checked as of 2026-06-16.

Kentucky law allows an exclusion from personal income tax for a portion of retirement and pension income, with rules and limits prescribed by KRS 141.021 and clarified in the Kentucky DOR's Schedule P Instructions. The maximum exclusion remains $31,110 per year for tax years beginning after January 1, 1998, and this amount is not adjusted for inflation or COLA. This exclusion applies per taxpayer; each spouse on a joint return may claim a separate $31,110 exclusion for their own eligible income.

Retirement income definition KRS 141.021 defines retirement income as income received from pensions, annuities, profit-sharing, or stock bonus plans described in Section 401(a), 403, or 457(b) of the Internal Revenue Code—including government or military retirement, IRAs, Keogh plans, and 401(k) or 403(b) arrangements. The statute further extends to "similar retirement income plans" for both public and private sector employees, provided they are tax-qualified under federal law. Nonqualified deferred compensation income or distributions from plans not recognized by the IRS do NOT meet the statutory definition and do not qualify for the exclusion.

Pre-1998 government-service carveout If a taxpayer's retirement income is from a "government retirement system" (such as the Kentucky Retirement Systems, federal civil service, or certain out-of-state government pensions) and includes service earned before January 1, 1998, the income allocable to that pre-1998 service is fully excludable, even above $31,110, so long as it is properly allocated and substantiated. Statute defines a "government retirement system" at KRS 141.021(4). Taxpayers must use Kentucky Schedule P and its worksheets to allocate benefits between pre-1998 and post-1997 service. See Schedule P (Lines 1–5 and associated worksheet) for step-by-step allocation instructions.

Reporting and substantiation To claim the exclusion, taxpayers complete Kentucky Schedule P, report all retirement distributions, separate excluded and taxable portions, and maintain supporting documents (usually 1099-R forms plus, for government service carveouts, an allocation worksheet from the retirement plan).

Authority and scope The exclusion and calculation are fully specified by KRS 141.021 and Schedule P. No provision allows inflation increases. The statute and DOR guidance do not address every edge case, including hybrid and rollover distributions: where authority is silent, claimants bear the burden of support. Residency is presumed by the Kentucky income tax filing requirement—nonresident filers with Kentucky-source retirement income follow these rules if required to file.

Source: KRS 141.021 Source: Kentucky Department of Revenue, 2025 Schedule P and Instructions.pdf)

Not yet human confirmed. The $31,110 exclusion and pre-1998 carveout are unequivocally set by statute and DOR instructions, but detailed plan-type treatment and unusual scenarios (e.g., partial rollovers, blended plan years) may require future review against both DOR guidance and case outcomes.

Kentucky personal income tax computation begins with federal adjusted gross income (AGI), but important modifications—additions and subtractions—are required under KRS 141.010 when calculating Kentucky adjusted gross income (KY AGI). Only after these adjustments is a taxpayer’s Kentucky taxable income determined. The primary sources for required additions and subtractions are Kentucky Revised Statutes § 141.010 (definitions) and the DOR’s Form 740 instructions and Sch. M.

Additions to Federal AGI Common additions required by KRS 141.010(13) include:

• Interest income on non-Kentucky state and local government obligations not exempted by Kentucky law (e.g., municipal bond interest from outside Kentucky is added back).
• State income taxes deducted on the federal return are not deductible in Kentucky—if such amounts reduced federal AGI via itemized deductions, they must be added back.
• Lump-sum pension distributions previously excluded from federal AGI must be included if not specifically exempt under Kentucky law.
• Passive activity loss carryovers from other years not previously included in Kentucky income must be included to the extent deductible for federal tax but not Kentucky.
• Other additions as specified and enumerated in KRS 141.010(13), which should be reviewed each year as legislative changes can affect the list.

Subtractions from Federal AGI Major subtractions from federal AGI under KRS 141.010(14) include:

• Interest income from obligations of the U.S. government (such as U.S. Treasury bonds) may be subtracted, provided the interest is included in federal AGI.
• Certain Social Security and Railroad Retirement Board benefits may be subtracted if included in federal AGI, though most are federally excluded.
• Portion of retirement and pension income up to the state exclusion ($31,110 or more for specific government service—covered in detail in the retirement section).
• Income from the Kentucky National Guard under qualifying active-duty circumstances.
• Other subtractions listed in KRS 141.010(14), such as certain pass-through entity adjustments, up to $10,000 of income from disaster-related qualified employer grants, certain military compensation, and the "Qualified disaster-related personal casualty loss deduction."

Reporting Method Taxpayers claim required additions and subtractions on Schedule M (Federal Adjusted Gross Income Modifications) of Kentucky Form 740. Each addition or subtraction line references the corresponding statutory authority or Department of Revenue guidance. Documentation for items (e.g., 1099-INT, 1099-R, supporting statements for subtractions) should be retained with the return.

Authority and Updates All statutory references are to KRS 141.010(13) (additions) and (14) (subtractions). These provisions and the detailed listed items are subject to change, and filers should always consult the most current year’s Form 740 instructions and Sch. M for updates as required by legislative or regulatory action.

Source: KRS 141.010 Source: Kentucky Department of Revenue, Form 740 and Schedule M Instructions (2025).pdf)