Kentucky · the numbers
Kentucky figures at a glance for 2026
Every Kentucky number the 2026 return turns on, in one place: the 3.5% rate, the $3,360 standard deduction, the $31,110 pension exclusion, the Family Size Tax Credit thresholds, the credits, the local occupational tax, the inheritance tax classes and the dates. With the 2025 figure beside each one, and a short list of what changed.
By Charles Trautman, EA, editor
Need to Know Tax · written from Kentucky Department of Revenue sources, November 3, 2026; updated November 12, 2026 after the election · not yet reviewed by a Kentucky practitioner
Kentucky has few moving parts: one flat rate, one standard deduction that is the same for every filing status, one pension exclusion, a handful of small credits and a Family Size Tax Credit that depends on the poverty guidelines. For 2026 the rate fell to 3.5% from 4%, the standard deduction rose $90 to $3,360, and the Family Size Tax Credit thresholds moved up a few hundred dollars. Everything else held: the $31,110 exclusion has not changed since 2018, the $40 personal credits since long before that. The 2026 Form 740 booklet had not been published when this was written, so where the Department has announced a figure the figure is here, and where it has not, the line says so.
The core figures
| Item | 2025 | 2026 | 2027 |
|---|---|---|---|
| Tax rate, all taxable income | 4% | 3.5% | 3.5% |
| Starting point | Federal AGI | Federal AGI | Federal AGI |
| Internal Revenue Code reference date | Dec. 31, 2024 | Dec. 31, 2025 | Dec. 31, 2025 |
| Standard deduction, per return, every filing status | $3,270 | $3,360 | $3,470 |
| Personal exemptions | None | None | None |
| Personal credit, age 65 or older, per person | $40 | $40 | $40 |
| Personal credit, legally blind, per person | $40 | $40 | $40 |
| Personal credit, Kentucky National Guard member | $20 | $20 | $20 |
| Pension income exclusion, per person (Schedule M, line 9) | $31,110 | $31,110 | $31,110 |
| Social Security and Tier 1 Railroad Retirement | Not taxed | Not taxed | Not taxed |
| Active-duty military pay | Not taxed | Not taxed | Not taxed |
| Capital gains | Taxed at 4% | Taxed at 3.5% | Taxed at 3.5% |
| Excess business loss limit (Form 461-K), single / joint | Federal Form 461 | $256,000 / $512,000 | to come |
| Estimated payments required when tax after withholding exceeds | $500 | $500 | $500 |
| Estimated tax safe harbor | 90% current / 100% prior | 90% current / 100% prior, annualized method added | same |
The standard deduction is indexed each year under KRS 141.081 and announced by the Department the September before the tax year. At 3.5%, the $3,360 deduction is worth $117.60 of tax, which is exactly the extra withholding the Department suggests for anyone with a second W-2.
The Family Size Tax Credit
Kentucky has no personal exemptions, no state earned income credit and no child credit. In their place the Family Size Tax Credit cancels all of the Kentucky tax when modified gross income is at or below the federal poverty guideline for the family size, then cancels 90%, 80% and so on down to 10% as income climbs to 133% of the guideline. Family size counts the taxpayer, a spouse in the household and qualifying children, up to four.
| Family size | 2025: 100% credit up to | 2025: no credit above | 2026: 100% credit up to | 2026: no credit above |
|---|---|---|---|---|
| One | $15,650 | $20,815 | $15,960 | $21,227 |
| Two | $21,150 | $28,130 | $21,640 | $28,781 |
| Three | $26,650 | $35,445 | $27,320 | $36,336 |
| Four or more | $32,150 | $42,760 | $33,000 | $43,890 |
The 100% thresholds and the family-of-four ceiling for 2026 are from the Department’s TY2026 e-file handbook; the other 2026 ceilings are 133% of the threshold, rounded the way the Schedule ITC table rounds, and should be checked against the 2026 Form 740 booklet when it appears. The credit is nonrefundable and is a percentage of the tax, so it is worth more to a family with more income inside the band.
The credits
| Credit | Figure | Refundable? | Where |
|---|---|---|---|
| Family Size Tax Credit | 10% to 100% of the tax, by family size and modified gross income (table above) | No | Line 21, Schedule ITC Section C |
| Child and dependent care credit | 20% of the federal Form 2441 credit | No | Line 24 |
| Education Tuition Tax Credit | 25% of the federal American Opportunity and Lifetime Learning credits, undergraduate study at a Kentucky institution only; maximum $625 per student (AOTC) and $500 per return (LLC); five-year carryforward | No | Line 23, Form 8863-K |
| Personal credits: 65 or older, blind, National Guard | $40, $40, $20, for taxpayer and for spouse | No | Schedule ITC Section B |
| Credit for income tax paid to another state | Lesser of the Kentucky tax on that income or the tax actually paid; not for wages from a reciprocal state | No | Schedule ITC Section A, line 6 |
| Refundable pass-through entity tax credit | Owner’s share of PTE tax the entity elected to pay | Yes | Line 31g, Form PTET-CR (verify) |
| State earned income credit | None | ||
| State child tax credit | None | ||
| 529 contribution deduction or credit | None | ||
| Renter’s or property tax credit on the income tax return | None |
Deductions and subtractions
| Item | Figure | Where |
|---|---|---|
| Standard deduction | $3,360 per return | Line 10 |
| Kentucky Schedule A, in place of the standard deduction, regardless of the federal choice | Home mortgage interest and points, investment interest, charitable gifts, gambling losses up to winnings, a few miscellaneous items. No taxes, no medical, no consumer-loan interest. | Line 10, Schedule A |
| Social Security and Tier 1 Railroad Retirement taxed federally | 100% | Schedule M, line 10 |
| Pension, annuity, IRA, 401(k) and Roth-conversion income | Up to $31,110 per person | Schedule M, line 9, Schedule P |
| Federal, Kentucky state or local government pension (military included), share earned before Jan. 1, 1998 | 100% of that share, no cap | Schedule P, Part I |
| Active-duty, Reserve and National Guard pay | 100% | Schedule M, line 13 |
| U.S. government bond interest | 100% | Schedule M |
| Federal bonus depreciation | Added back; Kentucky depreciation figured separately | Schedule M, line 3 (addition) |
| Federal deductions for tips, overtime, car-loan interest, seniors | Do not reach the Kentucky return |
Filing and payment dates
| Date | What |
|---|---|
| January 15, 2027 | Fourth 2026 estimated payment, Form 740-ES |
| April 15, 2027 | Form 740 and payment due; Form 740EXT or federal extension; first 2027 estimated payment |
| June 15, 2027 | Second 2027 estimated payment |
| September 15, 2027 | Third 2027 estimated payment |
| October 15, 2027 | Extended due date for the 2026 return; tax was still due April 15 |
| December 31, 2027 | Last day to apply to the county PVA for the 2027 homestead exemption |
| January 18, 2028 | Fourth 2027 estimated payment (January 15 is a Saturday, the 17th a holiday) |
| April 15, 2031 | Last day to amend the 2026 return: four years from the original due date |
Beyond the income tax
| Item | 2026 |
|---|---|
| Local occupational license tax on wages and net profits | Levied by most cities and counties where the work is done; 86 of 120 counties taxed payroll as of January 2024 at 0.5% to 2.25%, median 1%. Withheld by employers (W-2 Box 19); no credit against the state tax. |
| Louisville Metro occupational tax | 2.2% for residents (1.25% Metro, 0.2% TARC, 0.75% school boards); 1.45% for nonresidents who work there (verify 2026) |
| Lexington-Fayette occupational license fee | 2.25% of wages and net profits earned in Fayette County |
| State sales tax | 6%, no local sales taxes anywhere in the state; groceries and prescriptions exempt |
| Homestead exemption, age 65 or totally disabled | $49,100 off assessed value for the 2025 and 2026 tax years; 2027–2028 figure to come |
| Estate tax | None since 2005 |
| Inheritance tax, Class A (spouse, parent, child, grandchild, sibling, half-sibling) | Exempt |
| Inheritance tax, Class B (niece, nephew, in-law child, aunt, uncle, great-grandchild) | $1,000 exemption, then 4% to 16% |
| Inheritance tax, Class C (everyone else) | $500 exemption, then 6% to 16% |
| Inheritance tax return | Due 18 months after death; 5% discount if paid within nine months; Affidavit of Exemption (Form 92A300) when all passes to Class A |
| Reciprocal states for wages | Illinois, Indiana, Michigan, Ohio, Virginia (daily commuters), West Virginia, Wisconsin |
| Tax interest rate on late payments | 9% for 2026 and 2027; 2027 rate to come |
What changed from 2025
Rate, 3.5%. Down from 4% under House Bill 1 (2025). The budget trigger for a further cut was missed, so 3.5% holds for 2027.
Standard deduction, $3,360. Up $90. Announced by the Department September 4, 2025; the 2027 figure of $3,470 was announced September 11, 2026.
Code conformity, December 31, 2025. House Bill 757 (2026) adopted the 2025 federal law except the deductions for tips, overtime and car-loan interest and several business provisions. Because Kentucky starts from AGI, the change is mostly invisible on a wage earner’s return.
Family Size Tax Credit thresholds. Up with the poverty guidelines: $33,000 for a family of four, phasing out at $43,890.
Estimated tax penalty. Kentucky now mirrors the federal rules; Form 2210-K has an annualized income installment method.
Form 461-K. New, for excess business losses, $256,000 single and $512,000 joint, replacing the discontinued federal Form 461.
Form 8863-K. Carryforwards from the 2021 return have expired.
Not changed. The $31,110 pension exclusion, the $40 and $20 personal credits, the 20% child care credit, the 25% tuition credit, the inheritance tax classes and exemptions, the $49,100 homestead exemption, the 6% sales tax.
Worked example: one deduction or two
A married couple, both under 65, with $60,000 and $30,000 of wages and no other income. They can file a joint return (status 3) or separately on a combined return (status 2). The standard deduction is $3,360 per return, not per person, so the joint return gets one and the combined return gets two.
| Status 3, joint | Status 2, spouse A | Status 2, spouse B | |
|---|---|---|---|
| Federal AGI | $90,000 | $60,000 | $30,000 |
| Standard deduction | −$3,360 | −$3,360 | −$3,360 |
| Taxable income | $86,640 | $56,640 | $26,640 |
| Tax at 3.5% | $3,032.40 | $1,982.40 | $932.40 |
| Kentucky tax | $3,032.40 | $2,914.80 | |
Status 2 saves $117.60, the value of one $3,360 deduction at 3.5%. With a flat rate there is no bracket penalty to offset it, so the combined separate return wins whenever both spouses have income. Tax software usually picks it; a hand-prepared return often misses it. If one spouse itemizes on Kentucky Schedule A, both must.
Behind the scenes: why the numbers are small and still
Kentucky rebuilt its income tax in 2018. The graduated brackets became a flat 5%, the personal exemptions went away, the pension exclusion dropped from $41,110 to $31,110, and itemized deductions were cut to mortgage interest, charity and little else. The standard deduction and the Family Size Tax Credit were left as the only cushions for low earners, and both are indexed: the deduction to inflation under KRS 141.081, the credit to the federal poverty guidelines under KRS 141.066. Everything else in the 2018 design is a fixed dollar amount in statute, which is why the $31,110 and the $40 credits never move. The 2022 reform then set the rate on its half-point stairway down, with the budget tests described in the what’s-new article as the brake.
The one-deduction-per-return rule is older than the flat tax. Kentucky’s combined separate return, filing status 2, exists so couples can each compute their own tax on one piece of paper, and under the old graduated brackets it kept a second income out of a higher bracket (verify). The brackets are gone but the status survived, and now its only effect is the second deduction.
What to bring
- Last year’s Form 740, to compare each line at the new rate
- All W-2s and 1099s with Kentucky withholding, for Schedule KW-2; note Box 19 for the local tax
- 1099-R forms for every pension, IRA and annuity, and for a government pension the retirement date and months of service before 1998
- Form SSA-1099
- Mortgage interest statements, charitable receipts and gambling win/loss records, to test Kentucky Schedule A against $3,360
- Federal Form 2441 figures and Form 8863 figures, for the 20% and 25% credits
- Estimated payment dates and amounts for 2026
- For a business or rental: the federal depreciation schedule and any loss figures for Form 461-K
Questions people ask
What is the Kentucky income tax rate for 2026?
3.5% of taxable income, for everyone. It was 4% for 2025 and will be 3.5% again for 2027.
What is the standard deduction, and is it doubled for a married couple?
$3,360 per return for 2026, the same for every filing status. It is not doubled on a joint return. A couple with two incomes gets two deductions by choosing filing status 2, married filing separately on a combined return.
How much retirement income is exempt?
Social Security is fully exempt. Pensions, IRAs, 401(k)s and similar income are exempt up to $31,110 per person. Federal, Kentucky state and local government pensions, including military retirement, are exempt without limit for the share earned before 1998.
Does Kentucky have an earned income credit or a child tax credit?
No. The Family Size Tax Credit stands in for both: it eliminates the tax for a family of four with modified gross income up to $33,000 and phases out at $43,890. Kentucky does have a child care credit of 20% of the federal credit.
What local income tax will I owe?
It depends on where you work, not where you live. Most cities and counties take an occupational license tax of roughly 0.5% to 2.5% of wages; Louisville Metro takes 2.2% from residents and 1.45% from nonresidents, Lexington 2.25%. Your employer withholds it, and there is no credit for it on Form 740.
Is there an estate tax?
No, but there is an inheritance tax on the person who inherits. Spouses, children, parents, grandchildren and siblings pay nothing. Nieces, nephews, in-laws, aunts and uncles pay 4% to 16% above a $1,000 exemption; everyone else pays 6% to 16% above $500.
One rate, one deduction, one exclusion
Know 3.5%, $3,360 and $31,110, add the local tax on your paycheck, and the Kentucky arithmetic is mostly done.
Written by Charles Trautman, EA, editor · Need to Know Tax, Lone Tree, Colorado
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Forms and official pages named in this article
- Form 740, Kentucky Individual Income Tax Return (2025 version; 2026 to come)
- Form 740 instructions packet (2025)
- Schedule ITC, Kentucky Individual Tax Credit Schedule (2023 version, same structure)
- Schedule P, Kentucky Pension Income Exclusion (2023 version)
- Kentucky Schedule A (Form 740-NP), itemized deductions
- Form 8863-K, Kentucky Education Tuition Tax Credit
- 2026 Kentucky Withholding Tax Formula
Sources and where to check
- Kentucky DOR: Individual Income Tax overview, personal credits, refund timing (2025 figures at this writing)
- Kentucky DOR: TY2026 E-File Handbook, 2026 rate, deduction, Family Size Tax Credit thresholds, Form 461-K, due dates
- Kentucky DOR: 2026 standard deduction, $3,360
- Kentucky DOR: 2027 standard deduction, $3,470
- Kentucky DOR: 2025–2026 homestead exemption, $49,100
- Kentucky DOR: Military exemptions, active-duty pay and the $31,110 exclusion
- Kentucky DOR: A Guide to Kentucky Inheritance and Estate Taxes (92F101)
- 103 KAR 17:140, reciprocity with seven states
- Kentucky General Assembly: House Bill 1 (2025), the 3.5% rate
- Kentucky General Assembly: House Bill 757 (2026) bill record
- Louisville Metro Revenue Commission: occupational license tax rates
- Lexington-Fayette Urban County Government: occupational license fee, 2.25%
- Kentucky Association of Counties: 2024 county occupational tax rates