Credits and breaks for Kentucky families: the Family Size Tax Credit, child care, tuition, and what the state does not offer

A child changes nothing on the face of Form 740. There is no exemption to claim, no child credit, no earned income credit, and the $3,360 standard deduction is the same for a single filer and a family of six. Kentucky’s help for families runs through three credits instead. The Family Size Tax Credit is the big one: it counts the household, compares its income to the federal poverty guideline for that size, and cancels 100% of the Kentucky tax at or below the line, then 90%, 80% and so on down to 10% as income climbs to 133% of it. For 2026 a family of four owes no Kentucky tax at $33,000 of modified gross income and gets nothing from the credit above $43,890. The child and dependent care credit is 20% of the federal one. The Education Tuition Tax Credit is 25% of the federal American Opportunity or Lifetime Learning credit for undergraduate study at a school in Kentucky. All three are nonrefundable: they can bring the tax to zero and return every dollar of withholding, but they never pay out more than was withheld.

Two other things a Kentucky parent should know going in. The city or county occupational tax on wages, 2.2% in Louisville Metro and around 1% in a typical county, is not reduced by any of these credits, so a family that owes the state nothing still pays the local tax in full. And because Form 740 starts from federal adjusted gross income, the federal child tax credit, the federal EITC, the enlarged federal standard deduction and the new federal deductions for tips and overtime have no effect on the Kentucky tax at all.

Filing status for a family

Kentucky has no head-of-household status. A single parent who files as head of household federally files as single on Form 740, with the same $3,360 standard deduction as anyone else; there is no larger deduction and no better rate, because the rate is flat. A married couple chooses between a joint return and “married filing separately on this combined return,” and for a two-earner family the combined return nearly always wins, because each spouse’s column gets its own $3,360 while a joint return gets one. The Family Size Tax Credit is figured on the household’s total modified gross income either way, so the choice of status does not change the credit percentage, only the tax it applies to. The tuition credit, though, is denied to a couple filing fully separate returns; it requires single, joint or combined status.

The Family Size Tax Credit

The credit is on Form 740 line 21 and is computed in Section C of Schedule ITC. It has three inputs: family size, modified gross income, and the tax on line 19.

Family size is the taxpayer, the spouse if married and living together, and the qualifying children, up to a total of four. A qualifying child meets the usual tests: a son, daughter, stepchild, foster child, sibling or their descendant; living with you more than half the year; under 19, or under 24 and a full-time student for at least five months, or permanently and totally disabled; and not providing more than half of his or her own support. A single parent with one child is a family of two. A married couple with two children is a family of four, and so is a couple with five children; the table stops at four.

Modified gross income is federal adjusted gross income with a few things added back, chiefly tax-exempt interest and lump-sum distributions, and for a married couple it is the total for both spouses whatever the filing status. For most families it is simply AGI.

The thresholds are the federal poverty guidelines the Department adopted for 2026 in its e-file handbook; the 2026 Form 740 booklet with the full percentage table had not been published when this was written. Between the two columns the credit steps down: 90%, 80%, 70%, 60%, 50% and 40% in bands each 4% of the threshold wide, then 30%, 20% and 10% in bands 3% wide (verify). For a family of four that puts the 90% band at $33,001 to $34,320, 70% at $35,641 to $36,960, and 10% at $42,901 to $43,890. The 2025 thresholds were $15,650, $21,150, $26,650 and $32,150.

The percentage is applied to the tax on line 19, which is the 3.5% tax after the business credits and the personal credits for age and blindness on lines 15 and 17, but before the tuition credit on line 23 and the child care credit on line 24. At 100% the Kentucky tax disappears and every dollar withheld comes back. A single mother with two children earning $26,000 is a family of three under $27,320: her Kentucky tax of $792 after the standard deduction is wiped out, and her refund is whatever her employer withheld, about $792 under the 2026 formula. Her Louisville occupational tax of $572 is untouched.

The credit is nonrefundable. That matters less than it sounds, because the withholding formula collects roughly the right amount, so a 100% credit returns the whole year’s withholding. What the family does not get is anything on top, which is what a state earned income credit would provide. Kentucky has none.

The child and dependent care credit

Kentucky allows 20% of the credit computed on federal Form 2441, on Form 740 line 24. There is no separate Kentucky computation, no Kentucky income limit and no Kentucky list of expenses; whatever the federal credit is, Kentucky gives a fifth of it. For 2026 the federal credit runs from 50% of expenses at the lowest incomes down to 20% for most working families, on up to $3,000 of expenses for one child and $6,000 for two or more, so the Kentucky credit for a typical two-child family paying $6,000 or more for care is 20% of $1,200, which is $240. A family at the bottom of the income scale usually has no Kentucky tax left for it to reduce, because the Family Size Tax Credit got there first; the child care credit does its work for families in the $45,000 to $150,000 range, who get nothing from the family credit. Married couples must file jointly federally to take the federal credit, which rules out the Kentucky credit for a couple filing separate Kentucky returns, but the combined return is fine.

The Education Tuition Tax Credit

Form 8863-K gives a credit of 25% of the federal American Opportunity Credit and 25% of the federal Lifetime Learning Credit, with two Kentucky conditions. The school must be physically located in Kentucky, so a child at an out-of-state university earns the federal credit and nothing from Kentucky. And the expenses must be for undergraduate study; graduate tuition is out even for the Lifetime Learning portion. The American Opportunity portion is capped at $625 per student, which is 25% of the full $2,500 federal credit, and the Lifetime Learning portion at $500 per return. It is nonrefundable, but unused credit carries forward five years, as long as Form 8863-K is filed each year to keep the record; carryforwards from the 2021 credit have now expired. The federal Form 8863 must be attached, and the federal income phase-outs carry over because the Kentucky credit is a percentage of the federal one.

A family with two children at Kentucky universities, each generating the full $2,500 federal American Opportunity Credit, picks up $1,250 of Kentucky credit, enough to wipe out the Kentucky tax on $35,700 of income. For a family in that position the Kentucky credit is worth more than any other line on the return.

What Kentucky does not offer

Parents arriving from other states, or reading federal articles, will look for several things that are not here.

• No state earned income credit. The Family Size Tax Credit is the substitute, and it refunds withholding rather than paying out.
• No child tax credit and no dependent exemption. Kentucky abolished personal exemptions in 2018 and did not replace them. The only thing a dependent does on Form 740 is raise the family size for the credit.
• No 529 deduction or credit. Contributions to KY Saves 529, the state’s own plan, get no Kentucky break; Schedule M has no line for them. The federal benefits, tax-free growth and tax-free withdrawals for qualified education expenses, still apply, and so does the federal rule allowing 529 withdrawals for K-12 tuition and, from 2026, a wider list of K-12 expenses; Kentucky follows the federal definition of a qualified withdrawal because it starts from AGI.
• No K-12 tuition or expense credit for private school, home schooling or supplies.
• No adoption credit, no renter’s credit, no credit for property tax on the income tax return.
• No deduction for medical expenses on Kentucky Schedule A, which hurts a family with a child’s large uninsured bills; the federal deduction over 7.5% of AGI does not carry over.

What a Kentucky family does have is the ability to itemize for Kentucky while taking the federal standard deduction. Mortgage interest on the home and charitable gifts go on Kentucky Schedule A and, if they beat $6,720 for a couple on a combined return, replace the standard deductions. A young family with a new mortgage often qualifies; see How Kentucky income tax works.

Divorced and separated parents

The Family Size Tax Credit uses the same qualifying-child tests as the federal dependency rules, so the parent who claims the child federally counts the child in family size. A parent who released the exemption to the other parent on federal Form 8332 has released the child for Kentucky purposes too (verify). Child support is not income to the parent who receives it and not deductible by the parent who pays it, federally or in Kentucky, and alimony follows the federal rule for the year the divorce was finalized. A married couple living apart for the entire year file as single in Kentucky, each a family of one plus any children living with them.