Kentucky for retirees: Social Security untaxed, the first $31,110 of pension and IRA income excluded

Kentucky leaves most of a retiree’s income alone and taxes the rest at 3.5%. Social Security is subtracted in full on Schedule M, at any age and any income. Pensions, annuities, IRA and 401(k) withdrawals and every other kind of retirement plan income share one exclusion of $31,110 per person per year; a couple can shelter $62,220 between them, and anything above that is taxed like wages. Retirees from the federal government, the Commonwealth, a Kentucky city or county, or the armed forces do better: whatever share of the pension was earned before January 1, 1998 is exempt without limit, and the $31,110 applies only to the rest. Interest, dividends, capital gains, rent and part-time wages are taxed at 3.5% from the first dollar after the $3,360 standard deduction. The city and county occupational taxes that take a bite out of every working Kentuckian’s paycheck do not touch retirement income at all.

The exclusion is “up to $31,110,” not “untaxed,” and that distinction separates a Kentucky retiree who owes nothing from one with a surprise bill. A $40,000 pension leaves $8,890 in Kentucky income. A $150,000 IRA withdrawal to buy a house leaves $118,890, and $4,161 of Kentucky tax. The number is not indexed, so each year a little more pension income creeps over it.

Social Security: Schedule M, line 10

Whatever portion of Social Security or Tier 1 Railroad Retirement was taxed federally, the amount on line 6b of the Form 1040, comes off in full on Schedule M line 10. If none of it was taxable federally, there is nothing in AGI to subtract. There is no age test, no income limit and no phase-out. The subtraction does not use up any of the $31,110; that exclusion is for pensions and retirement plans only.

The $31,110 exclusion: Schedule M, line 9

Each taxpayer may subtract the smaller of $31,110 or the taxable retirement income in federal AGI. The Department of Revenue’s list of what qualifies is broad: pensions, annuities, IRA distributions, 401(k), 403(b) and similar plans, deferred compensation, death benefits, and disability payments under a written retirement plan; in practice, anything on lines 4b and 5b of the Form 1040. Roth conversions, inherited IRA distributions and early withdrawals with the federal 10% penalty all count; Kentucky has no age test and no penalty of its own.

Three rules govern it. It is per person, not per return: each spouse computes a separate exclusion in a separate column of Schedule M, whatever the filing status, and one spouse’s unused exclusion cannot shelter the other’s pension. A couple where he draws a $55,000 pension and she has no retirement income excludes $31,110, not $62,220. It is per year and does not carry over. And if your taxable retirement income is $31,110 or less, you simply enter it on line 9; Schedule P is needed only when the total exceeds $31,110 and some of it is a government pension.

The exclusion was $41,110 for 2017 and earlier years and has been $31,110 since 2018. It is not indexed.

Government pensions and Schedule P

Kentucky’s older arrangement, under which government pensions were entirely exempt, survives for service before 1998. Anyone who retired from the federal government, the Commonwealth or a Kentucky local government before January 1, 1998 excludes the whole pension. Anyone who retired later computes a percentage on the Schedule P worksheet: total months of service credit, less the months earned after December 31, 1997, divided by the total. That share of the pension goes on Schedule P line 1 and is exempt with no ceiling; the remaining share goes on line 2 and counts toward the $31,110. The percentage is fixed at retirement and used every year after, so it is worth getting right once and keeping the worksheet.

A teacher who retired in 2020 with 360 months of service, 96 of them before 1998, has an exempt percentage of 26.7%. On a $60,000 pension, $16,000 is exempt outright, and the other $44,000 is measured against $31,110, leaving $12,890 of Kentucky income. Had she retired from a private employer with the same $60,000 pension, $28,890 would be taxable. Military retirement is a federal pension for this purpose; a retiree who enlisted in 1990 and retired in 2012 exempts roughly a third of the pension without limit and shelters the rest with the $31,110.

Roth conversions

A Roth conversion is reported as an IRA distribution on federal line 4b, and the Department counts it as retirement income for the exclusion. That cuts two ways. A retiree with no other pension income can convert $31,110 a year to a Roth and pay Kentucky nothing on it; a couple can convert $62,220. But the exclusion is one bucket, not two, so a retiree already drawing a $31,110 pension pays 3.5% on every converted dollar, and a $100,000 conversion on top of that pension costs $3,500 of Kentucky tax beyond the federal bill. The planning point is to size conversions to the unused room under $31,110 in the years before Social Security and required distributions fill it. The federal side still bites either way: the conversion raises AGI, which can make more Social Security taxable and raise Medicare premiums two years later through IRMAA.

The federal senior deduction, and the $40 credit

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, comes off after adjusted gross income. Form 740 starts from AGI and applies Kentucky’s own $3,360 standard deduction or Kentucky Schedule A, so the senior deduction never arrives and no add-back is needed. The same is true of the extra federal standard deduction for age. What Kentucky offers instead is a $40 personal credit for each taxpayer and spouse who is 65 or older by December 31, and another $40 for legal blindness, claimed on Schedule ITC Section B. On a combined return each spouse’s credit offsets only that spouse’s column of tax, and it is nonrefundable, so a spouse with no taxable income gets nothing from it.

Property tax: the homestead exemption

Kentucky’s help for older homeowners is on the property tax bill, not the income tax return. Under KRS 132.810 a homeowner who is 65 or older during the tax year, or classified as totally disabled by a public or private retirement system, has $49,100 taken off the assessed value of the home for 2025 and 2026. The figure is recalculated every two years for inflation; the 2027–2028 amount is to come, usually announced in November. On a home assessed at $250,000, the exemption cuts the taxable value to $200,900; the saving depends on the local rate, which combines the state’s 10.9 cents per $100 (verify) with county, city, school and special district rates. The home must be owned and occupied as the principal residence on January 1. Apply once with the county Property Valuation Administrator, by December 31 of the year claimed. Nothing about it appears on Form 740. There is no circuit breaker, no renter’s credit and no assessment freeze; two constitutional amendments to freeze assessments for seniors were filed in 2026 and did not reach the ballot.

The inheritance tax

Kentucky has had no estate tax since 2005 and has no gift tax, but it is one of a handful of states with an inheritance tax, owed by the person who receives the property and set by the relationship to the person who died. Class A, which is the surviving spouse, parents, children, stepchildren, grandchildren, brothers, sisters and half-siblings, pays nothing. Class B, which is nieces, nephews, half-nieces and half-nephews, sons- and daughters-in-law, aunts, uncles and great-grandchildren, gets a $1,000 exemption and then pays 4% on the first $9,000, rising in steps to 16% above $200,000. Class C, which is everyone else, including cousins, nieces and nephews by marriage, great-nieces and great-nephews, friends and unmarried partners, gets $500 and pays 6% rising to 16% above $60,000. A $50,000 bequest to a niece costs her $3,160; the same bequest to a longtime companion costs $4,870. The return is due 18 months after death, with a 5% discount for paying within nine months; when everything passes to Class A and no federal estate tax return is required, the executor files an Affidavit of Exemption (Form 92A300) with the court instead. Life insurance payable to the estate is taxable property; a policy payable to a named beneficiary is generally outside the tax. The inheritance tax is the one reason a Kentucky retiree without children may want a will drawn by someone who knows the classes.

Moving in, moving out

Federal law since 1996 bars a state from taxing the retirement income of someone who no longer lives there. A pension earned elsewhere and paid to a new Kentucky resident is Kentucky’s to tax, under Kentucky’s rules; a Kentucky retiree who moves away stops owing Kentucky on the pension the day residency ends, and the $31,110 does not travel. In the year of a move the return is Form 740-NP, which reports pension income received while a Kentucky resident and allows the exclusion against that amount, up to $31,110 per taxpayer. See Moving to Kentucky.

Withholding and estimated payments

Pension payers and IRA custodians will withhold Kentucky tax on request, and for a retiree whose retirement income runs well above $31,110 it is the easiest way to stay even. The ones who get a penalty notice have large taxable brokerage accounts, rental income, a pension far above the exclusion, or a one-time IRA withdrawal, because nobody withheld on it. Estimated payments are required when the expected tax after withholding exceeds $500; for 2026 the safe harbor follows the federal pattern, 90% of this year’s tax or 100% of last year’s.