What Is the Kentucky Income Tax Rate?

Kentucky residents and those earning income within the state encounter a tax system that includes both state-level income tax and various local assessments. Understanding these components is important for managing personal finances and ensuring compliance. The state’s approach to income taxation, combined with local fees, shapes the overall tax landscape for individuals and businesses.

Kentucky’s State Income Tax Rate

Kentucky imposes a flat individual income tax rate of 4% for the 2025 tax year. This means a single percentage applies to all taxable income, simplifying calculations compared to progressive systems. Legislation allows for a potential future reduction to 3.5%, effective January 1, 2026, if certain fiscal conditions are met.

Calculating Kentucky Taxable Income

Determining Kentucky taxable income involves several steps, beginning with your gross income, which includes wages, salaries, interest, dividends, and business earnings. This amount is then adjusted to arrive at your Kentucky adjusted gross income (AGI). Kentucky’s tax law generally aligns with the Internal Revenue Code as of December 31, 2023, but requires specific modifications. For instance, interest income from bonds issued by other states must be added back to federal AGI, while interest from U.S. government bonds can be subtracted. Further adjustments, such as those related to partnership or S-corporation income and certain federal depreciation amounts, may also be necessary.

After these modifications, taxpayers can reduce their AGI by taking either a standard deduction or, if applicable, itemized deductions. For the 2025 tax year, the standard deduction is $3,270, adjusted annually for inflation. Certain types of income, like Social Security benefits and active-duty military pay, are fully exempt from Kentucky income tax and can be subtracted from income. Additionally, a portion of retirement and pension income, specifically the first $31,110, is exempt from state taxation.

Tax Credits and Other Reductions

After calculating taxable income and applying the state tax rate, tax credits can further reduce the actual amount of tax owed. Unlike deductions, which lower your taxable income, tax credits directly reduce your tax liability on a dollar-for-dollar basis. Common individual tax credits include:

A $40 credit for each person aged 65 or over and another $40 for those who are legally blind.
A $20 credit for members of the Kentucky National Guard.
The Child and Dependent Care Credit, allowing taxpayers to claim 20% of the federal credit amount.
A Family Size Tax Credit, determined based on modified gross income and the number of family members.
An Education Tuition Tax Credit, amounting to 25% of the federal American Opportunity and Lifetime Learning Credits.
A credit for taxes paid to another state on income also taxed by Kentucky.

Understanding Local Occupational Taxes

Many Kentucky cities and counties impose their own occupational license taxes, distinct from the state-level assessment. These local taxes are typically levied as a percentage of gross wages for employees or net profits for businesses operating within the specific jurisdiction. The rates for these occupational taxes vary significantly from one locality to another, ranging from approximately 0.5% to 2.25% for counties. For example, specific city rates like Covington’s 2.45% or Florence’s 2.00% illustrate this variability. Employers often withhold these local occupational taxes directly from employee paychecks for convenience. Individuals should confirm specific rates and regulations with their local government to understand their obligations.